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EFRAG report on survey results on the impact of the forthcoming new IFRS on leases on financial covenants in loan agreements

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

09 Dec 2015

EFRAG has issued a report summarising the results of a public survey conducted by the IASB and the National Standard Setters of France, Germany, Italy, Lithuania, and the UK on the potential impact of the forthcoming new IFRS on leases on financial covenants in loan agreements.

The survey asked lenders and non-lenders different questions related to the use of covenants. For lenders, the survey results indicate a diversity in practice but most agreed that their loan agreements included at least one of the following:

  • “automatic renegotiation clauses in the case of a change to accounting principles, at least for some of their agreements;
  • frozen GAAP provisions; or
  • adjustments for operating lease commitments in determining covenants.”

For this reason, they do not expect IFRS 16 to cause breaches of covenants. However, most lenders stated that they will reevaluate the terms and conditions of covenants when IFRS 16 is effective.

For non-lenders, most respondents expect that either (a) covenants will not be impacted with the issuance of IFRS 16 or (b) covenants will be renegotiated if IFRS 16 affects covenant ratios.

For more information, see the report on the EFRAG’s website.

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