Desk-top review on companies' bank covenants disclosures

Oct 25, 2018
IAASA recently published the results of a desk-top review into the bank covenant disclosures that companies included in their 2017/18 annual accounts. The review covered the 2017/18 annual accounts of 27 companies listed on Euronext Dublin (Irish Stock Exchange). The document is available here.

Background

The disclosure of financial ratios and other terms agreed with lenders along with details of how those ratios are calculated is relevant information for the users of annual accounts. The disclosure of such information can assist users of annual accounts assess the creditworthiness and liquidity risk of a company. Such information is particularly relevant for users of annual accounts in cases where the company is in a vulnerable financial position.

Key review results

IAASA's desk-top review identified that:

  • 22 companies had a combined total debt amounting to €25.5 billion (2016/17: €25.9 billion) and the remaining five issuers had no bank borrowings;
  • Eight of the 22 companies did not disclose any description of their covenants set by their lenders;
  • Two of the 22 companies disclosed the terms of their covenants but did not disclose the actual measures achieved;
  • Two of the 22 companies disclosed the terms of one of their covenants, together with actual measures achieved. However, these two companies failed to disclose any information of other covenants imposed; and
  • Two of the 22 companies disclosed both the covenant terms and the actual measures achieved. However, the reconciliation/basis of calculation of the actual measures was not readily apparent from the disclosures in the financial statements. 
IAASA will continue to focus on this topic in its 2019 examinations and will engage with companies in relation to:

  • The rationale for not disclosing a description of the covenants imposed by the company's lender;
  • Disclosing the calculation of the covenants per the lending agreement;
  • Disclosing the penalties in the event of a bank covenant being breached; and
  • Providing the disclosures required by accounting standards if and when a breach of a covenant has occurred.

Source: IAASA.