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Banking Covenants


Christine Mills on May 11, 2011 in Assurance & Advisory

Do You Have Banking Covenants?

If so, are you aware of the impact the new accounting standards for private enterprise will have on those banking covenants? If not, now is the time to start thinking about it and have discussions with your bank and your assurance provider.

On January 1, 2011, all profit-oriented enterprises, that are not publically accountable, were required to adopt either International Financial Reporting Standards (“IFRS”) or Accounting Standards for Private Enterprise (“ASPE”). The majority of you have likely chosen to adopt ASPE because it allows some of the same accounting policy choices you may have used under differential reporting.

However, when you were making this choice did you review your banking agreement? If not, now is a good time to review how the agreement defines “Generally Accepted Accounting Principles”. If it is unclear, we would recommend a call to the bank to clarify that ASPE meets their requirements.

It is important to understand that the adoption of ASPE will mean some changes to your accounting policies and the presentation of your financial statements which in turn, could impact the calculation of typical covenant ratios such as your “Current Ratio” or “Debt to Tangible Net Worth”.

Also consider that upon transition, ASPE allows a company a one-time opportunity to make certain accounting policy choices. For example, you can choose to account for income taxes by using either the future income tax method or the taxes payable method. Since the choices you make will impact the calculation of your covenants, we recommend that once you have made your accounting policy choices, you have an upfront discussion with the bank regarding the impact on your financial statements.

If you are required to report your covenants to the bank on a quarterly basis, the impact of these choices/changes need to be discussed now. If you report your covenants annually, the summer presents an excellent time to work with your assurance provider to understand ASPE and make progress on your transition plan. Based on our knowledge of your business we can help you evaluate the impact of your transition decisions and help facilitate any communication you need to have with your bank.