Almost every loan agreement will be carrying some of the terms and conditions that are required to be fulfilled by a borrower to keep that loan continue as per the agreed terms OR an immediate re-payment might be initiated which can end the relationship related to the debt.
Often these terms are e.g. agreed debt /equity ratio, capital expenditures, default in payments etc. However there is nothing to be done in terms of accounting treatment under current system that is being followed before adopting Ind-As as per the road map suggested by MCA.
Now, After the applicability of Ind-As/ IFRS, the situation will be different and whenever such breach of covenants happens, the classification of such liabilities might change which will eventually affect the ratios and balance sheet strength for sure.
Let’s have a quick look at the relevant references for such requirements-
Ind-AS 1 – Presentation of Financial Statements
Para -74 -Where there is a breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, the entity does not classify the liability as current, if the lender agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment as a consequence of the breach,
Para-75- However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.
Now,
After reading the clauses as above, it is clear that in case any material covenant will be breached by a borrower relating to its long-term loan, then the loan will be treated as immediate payable and accordingly it will be re-classed from non-current to current liability subject to the cases where lender.............................for further read please refer link - http://gyanifrs.com/2017/04/breach-of-covenants-of-a-loan-classification-change-under-ind-as/
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Often these terms are e.g. agreed debt /equity ratio, capital expenditures, default in payments etc. However there is nothing to be done in terms of accounting treatment under current system that is being followed before adopting Ind-As as per the road map suggested by MCA.
Now, After the applicability of Ind-As/ IFRS, the situation will be different and whenever such breach of covenants happens, the classification of such liabilities might change which will eventually affect the ratios and balance sheet strength for sure.
Let’s have a quick look at the relevant references for such requirements-
Ind-AS 1 – Presentation of Financial Statements
Para -74 -Where there is a breach of a material provision of a long-term loan arrangement on or before the end of the reporting period with the effect that the liability becomes payable on demand on the reporting date, the entity does not classify the liability as current, if the lender agreed, after the reporting period and before the approval of the financial statements for issue, not to demand payment as a consequence of the breach,
Para-75- However, an entity classifies the liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.
Now,
After reading the clauses as above, it is clear that in case any material covenant will be breached by a borrower relating to its long-term loan, then the loan will be treated as immediate payable and accordingly it will be re-classed from non-current to current liability subject to the cases where lender.............................for further read please refer link - http://gyanifrs.com/2017/04/breach-of-covenants-of-a-loan-classification-change-under-ind-as/
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