Our ‘IFRS Viewpoint’ series provides insights from our global IFRS team on applying IFRSs in challenging situations. Each issue will focus on an area where the Standards have proved difficult to apply or lack guidance. This issue considers how the existence of covenants can impact the presentation of debt on the balance sheet.
Loan agreements often include covenants that, if breached by the borrower, permit the lender to demand repayment before the loan’s normal maturity date. In response to a borrower’s request, lenders may decide to voluntarily waive some or all of the rights they acquire as a result of a breach. This IFRS Viewpoint provides guidance on the classification of long-term loans payable as either current or non-current when covenants are present.
Classification of a long-term loan payable as either a current or non-current liability is based on the existing rights of the borrower and lender (the ‘condition of the loan’) at the reporting date:
Our more detailed comments below assume that a breach of a borrowing covenant entitles the lender to require repayment on demand.
