IASB amends standards for long-term debt covenants

Accounting

The International Accounting Standards Board updated its standards Monday to improve the information provided by companies about their long-term debts with covenants.

The amendments to International Accounting Standard 1, Presentation of Financial Statements, require a company to classify debt as non-current only if it can avoid settling the debt in the 12 months after the reporting date. However, the IASB noted that a company’s ability to do so is often subject to complying with covenants. For example, a company may have long-term debt that could become repayable within 12 months if it fails to comply with covenants in that 12-month period.

The amendments to IAS 1 specify that covenants to be complied with after the reporting date don’t affect the classification of debt as current or non-current at the reporting date. Instead, the amendments require companies to disclose information about these covenants in the notes to their financial statements.

The IASB anticipates the amendments will improve the information a company provides about its long-term debt with covenants by allowing investors to understand the risk that the debt could become repayable early. 

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The amendments come in response to feedback from stakeholders on the classification of debt as current or non-current when applying requirements introduced in 2020 that aren’t yet in effect. They take effect for annual reporting periods starting on or after Jan. 1 2024, with early adoption allowed.

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