Bank covenants: waiver before the balance sheet date and debt classification

What is a bank covenant waiver?

A covenant is a financial condition in a loan agreement. A waiver is the bank's formal consent not to enforce consequences of a breach, usually for a defined period or test date. For financial reporting, timing matters because it determines whether the company had the right to defer repayment at the balance sheet date.

IAS 1 debt classification logic

Under IAS 1 logic, liabilities are classified as current if the entity does not have the right at the reporting date to defer settlement for at least twelve months. A waiver signed after the reporting date may be a subsequent event, but it may not change the classification at year-end.

Typical covenant tests

• net debt / EBITDA,
• DSCR,
• equity ratio,
• interest cover,
• minimum liquidity or cash balance.

Audit implications

The auditor will request the loan agreement, covenant calculation, bank correspondence, waiver document, board assessment and disclosure draft. If classification changes to current, liquidity ratios and going concern assessment may also change.

How should the CFO manage the bank discussion?

The CFO should approach the bank before the reporting date with a quantified breach analysis, recovery forecast, updated budget and requested waiver wording. A late request after final accounts are prepared reduces negotiating power.