From the course: Accounting Foundations: Leases
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Renegotiating loan agreements
From the course: Accounting Foundations: Leases
Renegotiating loan agreements
- One transition difficulty with the new lease accounting standards is the impact of the new numbers on company's compliance with their existing loan agreements. It is often the case that bank loan contracts include an accounting number thresholds as warning triggers. These provisions are called loan covenants or debt covenants. These loan covenants are intended to reduce the risk to the bank by constraining the borrowing companies behavior, limiting the borrowing company's ability to borrow more money from their banks, requiring the borrowing company to maintain operating profits at certain levels, and so forth. For example, assume that borrowing company has a large loan from bank B. The loan contract contains a covenant stating that if borrowing company's debt ratio, which is total liabilities divided by total assets, exceeds some threshold, say 60%, the loan agreement is violated and the loan from bank B must be…
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