The International Accounting Standards Board and the US Financial Accounting Standards Board have recently published an Exposure Draft proposing changes to how leases should be accounted for in financial statements prepared in accordance with IFRS or US GAAP.
Currently, there is a different accounting treatment for a lease depending on whether it is classified as a finance lease or an operating lease. The proposals recommend a consistent accounting treatment for both types of lease. If the proposals are implemented in their current form, they could affect the ability of certain borrowers to comply with financial covenants in facility agreements and other finance documents.
Whilst the proposals are currently the subject of consultation, it is possible that they could be implemented in time for the financial year ending 31 December 2013. It is therefore essential that affected borrowers and lenders are made aware of the proposals and begin to consider now the impact which they will have on financial covenants that are intended to operate over the longer term.
In this article, we examine the potential impact of the proposals on financial covenants and consider how lenders and borrowers might choose to respond to them, both as regards existing and new facility agreements.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 22/09/2010.
