Page 30 - 1. COMPILER QB - INDAS 1

Q11 (Jan 21 – 5 Marks)

Entity A had obtained a long-term bank loan during January 2019, which is subject to certain financial

covenants. One of such covenant states that during the tenure of the loan, debt equity ratio of 65:35 is to be
maintained at all time. In case of breach of this covenant, the loan will be repayable immediately. The loan

agreement also states that these covenants will be assessed at the end of each quarter and reported to the
bank within a month from the end of each quarter. If the covenants are breached at this time, the loan will

be repayable immediately. The entity closes its annual accounts as on 31st March every year.
You are required to show how the loan will be classified as on 31st March 2020, if:

(i) At the financial year end, Entity A determines that it is not in breach of any of the covenants;
(ii) At the quarter ending 31st December 2019, Entity A's debt equity ratio became 75:25 and thus breaches

the covenant, however it obtains a waiver from the bank. The terms of the waiver specify that if Entity A
rectifies the breach within a period of 12 months from the reporting date then the bank cannot demand
repayment immediately on account of the breach during this period. Entity A expects to rectify the breach
by raising additional equity capital by means of a rights issue to the existing shareholders and expects
that the issue will be fully subscribed;
Considering the same facts as in (ii) above, except obtaining the waiver clause, what would be your answer?

Solution

Para 74 of Ind AS 1 ‘Presentation of Financial Statements’, states that where there is a breach of a
material provision of a long-term loan arrangement on or before the end of the reporting period with the
effect that the liability becomes payable on demand on the reporting date, the entity does not classify the
liability as current, if the lender agreed, after the reporting period and before the approval of the financial
statements for issue, not to demand payment as a consequence of the breach.
However, an entity classifies the liability as non-current, if the lender agreed by the end of the reporting

period to provide period of grace ending at least twelve months after the reporting period, within which the
entity can rectify the breach and during which the lender cannot demand immediate repayment.
(i) The entity has obtained a long-term loan during January, 2019. Since repayment period of the loan is
not mentioned in the question, it is assumed that on 31st March, 2020, the repayment period of the
loans in more than 12 months. Further, the entity has not breached the covenants specified in the

loan; therefore, as at 31stMarch, 2020, the loan will be classified as ‘non-current liability.
(ii) In the second case though, there is a breach of covenant on 31st December, 2019 i.e. before reporting
date of 31st March, 2020, yet the bank agreed to provide a period of grace for twelve months from
the reporting period, within which the entity. A can rectify the breach and during this period bank
cannot demand immediate repayments. Also, entity A has intention to rectify the breach. Thus, entity
A will classify the liability of bank loan as non-current liability in its books as at 31stMarch, 2020.

(iii) (b) Para 74 of Ind AS 1 ‘Presentation of Financial Statements’, states that where there is a breach of
a material provision of a long-term loan arrangement on or before the end of the reporting period with
the effect that the liability becomes payable on demand on the reporting date, the entity does not
classify the liability as current, if the lender agreed, after the reporting period and before the approval

of the financial statements for issue, not to demand payment as a consequence of the breach.

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