Covenant breaches and debt classification

A covenant breach that gives the lender an unconditional right to demand repayment at the reporting date forces reclassification of the entire facility to current liabilities unless a waiver is obtained on or before that date, which can flip a healthy-looking balance sheet into one showing a working capital deficit and trigger going concern disclosure, directly affecting how lenders, rating agencies and investors read the company's solvency.

Were all financial covenants tested as of the reporting date using the loan agreement's own definitions? Was any waiver or covenant reset obtained and dated on or before the reporting date, not after? If no qualifying waiver exists, is the entire outstanding facility balance (not just the breached portion) reclassified to current liabilities? Do cross-default clauses spread this breach into default rights over otherwise-compliant facilities elsewhere in the group?

1) Identify every financial covenant (LTV, DSCR, ICR, gearing, minimum equity) attached to each facility and confirm the testing dates and measurement basis per the loan agreement. 2) Test compliance as of the reporting date using the agreement's own definitions (which may differ from IFRS figures, e.g., valuation-based LTV using bank valuations). 3) Where a breach exists at the reporting date, determine whether it gives the lender the right to demand repayment on demand or within 12 months. 4) Check whether a waiver, covenant reset, or amendment was obtained from the lender on or before the reporting date (not after) - only an agreement dated on or before period end cures the classification. 5) If no such waiver exists by the reporting date, classify the entire loan balance (not just the amount in breach) as a current liability, even if the waiver is subsequently obtained before the financial statements are authorized for issue. 6) Trace cross-default clauses across all group facilities, since a breach on one facility can trigger default rights on unrelated facilities that were otherwise compliant. 7) Assess whether the breach and reclassification raise a material uncertainty over going concern requiring separate disclosure and evaluation under the going concern basis of preparation. 8) Disclose the breach, any post-year-end waiver obtained, and the classification impact even though the waiver does not change the balance sheet classification.

The current/non-current split is a classification question, not a remeasurement of the loan itself: the carrying amount of the facility (amortized cost under the effective interest method) is unchanged, but its presentation moves entirely to current liabilities when the lender holds an unconditional right to call the debt at the reporting date. Cross-default exposure should be measured/assessed facility by facility across the group to determine the full amount affected. Any modification of terms agreed with the lender (fee, rate change, extended tenor) that is substantial under IFRS 9 modification/extinguishment guidance may also need separate assessment once agreed, but that is a distinct question from the current/non-current classification at the reporting date.

Disclose the nature of the covenant breach, the facility and amount affected, the fact that the entire balance is presented as current, the date and terms of any waiver obtained as a non-adjusting subsequent event, cross-default exposure across other facilities, and the entity's assessment of going concern and liquidity in light of the reclassification.

• 1) Presenting a breached facility as non-current based on a waiver signed after the reporting date. 2) Reclassifying only the technically-breached covenant'
• s '
• excess'
• amount rather than the entire outstanding facility balance. 3) Overlooking cross-default clauses that spread one facility'
• s breach into default rights over otherwise-compliant facilities across the group. 4) Testing covenants only at the annual reporting date when the loan agreement actually requires quarterly or semi-annual testing, missing interim breaches. 5) Treating a post-year-end waiver as sufficient to avoid any disclosure, when disclosure of the breach and the waiver as a subsequent event is still required.