Why IFRS 16 matters for borrowers
From 1 January 2019, IFRS 16 comes into effect and most, if not all, businesses will be affected as renting or leasing is one of the most frequently used ways to obtain access to assets without incurring significant up front capital outlay or to mitigate the risk of obsolescence.
IFRS 16 redefines the treatment of leases, virtually eliminating off balance sheet accounting for leasees, and has consequential effects on many common financial metrics such as gearing, EBITDA and interest cover.
These changes may also have consequences for businesses which have entered into loan agreements. Most, if not all, loan agreements include provisions that, among other things, measure performance and borrowings by reference to these metrics and restrict the entry into further financial indebtedness.
Between now and 31 December 2018 all business may wish, if they haven't already done so, to review their loan agreements and in particular the financial covenants to check that they have sufficient headroom in those covenants and any applicable baskets or default thresholds and following that review to seek any necessary amendments to the terms of those loan agreements to avoid being in default on 1 January 2019.