Renegotiate loan terms or they can turn into “short-term liabilities”, corporate auditors warn

MUMBAI: Auditors are asking companies to either renegotiate their existing loan terms or be prepared to face the risk of reclassifying them as “current liabilities” on their books because some covenants were violated while collecting additional funds to deal with the disruption of Covid-19.

Many companies, including some of India’s largest companies, have seen their debt rise due to the impact of the pandemic.

Unless renegotiated, many existing loan agreements would give additional rights to lenders, leading to reclassification of loans in accordance with auditing standards, experts said.

“Many companies that have significant debt on their books could violate one or more of the covenants in their loan agreements due to the negative impact of the Covid-19 pandemic on their businesses, so these loans could become payable. on demand, and in some cases this could also trigger a cross default on their other loan agreements, ”said Sai Venkateshwaran, partner at KPMG India. “In such situations, companies and their lenders will have to work together to ensure that these violations are lifted or corrected, otherwise these loans would be classified as current liabilities and thus negatively impact key ratios such as the current ratio. ”

In many situations, auditors are required to “test” debt for immediate risk or long-term liability.

If loans are classified as “current liabilities” in the year-end financial statements, this will impact the company’s liability-to-asset ratio, which will hamper its ability to raise additional funds.

Most companies have seen their debt increase dramatically amid the pandemic.

Many auditors urge businesses to get their homes in order in a month or so. Auditors are required to give their opinion in year-end financial statements and will have to raise red flags regarding debt, experts said.

“The Covid-19 pandemic has resulted in violations of certain covenants such as revenue, EBITA, debt service ratio, leverage ratio, material adverse changes, liquidity, etc.”, a lead auditor Vinayak Padwal told ET. “This has created challenges for both management and the auditors with respect to the proper classification and disclosure of these loan liabilities in the financial statements at the reporting dates. While the companies are in the process of renegotiating such covenants with lenders, auditors hope the whole process will be completed before signing the financial statements. ”

Some of the larger companies have already started these negotiations and are reportedly looking to update these contracts.

In some cases where lenders are unwilling to agree to more lenient terms, companies are also looking to trigger the force majeure clause, insiders have said.

This comes at a time when auditors are also preparing to implement new auditing standards on the line of global standards – International Financial Reporting Standards, or IFRS.

“In addition to the impact of the pandemic, recent changes in accounting standards, which come into effect in 2023, could lead to even more loans being classified as current liabilities, as the new requirements and associated clarifications ignore contractual conditions and their design. , and instead requires that a hypothetical covenants compliance test be performed at the end of the period, ”said Venkateshwaran.

“Given the importance of these changes, businesses are encouraged to take action now and work with their lenders to rethink the construction of some of these loan clauses. ”

Although the new standards are two years away, auditors said it was the only window companies have to renegotiate contracts. Lenders may not agree to new terms for existing loans at a later stage, which will have a greater impact when the new accounting standards are implemented.


Source link

Leave a reply