Accounting for breaches of debt covenants

About this report or communique

The impact of COVID-19 can result in a significant deterioration in operating results and financial positions which may in turn cause breaches of debt covenants or trigger subjective covenant clauses in loan agreements. These could render the related debt repayable on demand before the contractual maturity date, resulting in the borrowing being classified as a current liability rather than non-current liability at the reporting date.

When loan agreements include subjective covenant clauses – e.g. ‘material adverse change’ clauses – State entities will need to exercise judgement in determining whether such clauses are breached.

Even if a breach has not occurred by the reporting date, State entities will need to assess their ability to maintain compliance with debt covenants, in order to decide whether to renegotiate the covenant clauses with lenders. Such negotiations can lead to a waiver of the breach or loan agreement variation from the lending authority.

See the attached communique for more information including what considerations should be made where a breach of loan covenant occurs.