Curing a Bank Covenant Violation by Obtaining a Waiver from the Lender

July 15, 2020

By Steven Heumann

Due to the economic environment caused by the COVID-19 pandemic, companies may find that they are in violation of one or more of their bank covenants at the balance sheet date. As a result, companies will have to ask their lender for a waiver to cure the violation(s). Accordingly, companies should carefully review the waiver in order to determine the appropriate classification of the debt at the balance sheet date. In this article, we will be discussing the classification of long-term debt, assuming it does not have a subjective acceleration clause, when a company is in violation of its bank covenants at the balance sheet date and has received a waiver from its lender.

Based on the guidance in ASC 470, Debt, when a violation of a debt covenant gives the lender the right to call the debt at the balance sheet date the debt is classified as current unless the lender grants a waiver to the company curing the violation for a period greater than one year from the balance sheet date.  However, if the debt agreement requires the company to meet the same covenant or more restricted covenants on other than an annual basis (i.e., quarterly or semiannually), the debt will not automatically be classified in accordance with its payment terms. 

In order for a company to support that the debt should be classified as noncurrent at the balance sheet date, it must determine if it is probable that it will not fail the same or more restrictive covenants going forward within one year from the balance sheet date.  If it is not probable, the debt must be classified as current despite the waiver. Judgement must be exercised in assessing the probability of a company being able to comply with covenants based on its projections. The COVID-19 pandemic has created an uncertain economic environment. As a result, these projections may be more difficult to prove than in the past.

About Steven Heumann

Mr. Heumann, a Director in EisnerAmper's Technical Accounting Advisory Services Group, has experience working with public companies and privately held business in providing technical accounting consulting services to multinational SEC registered companies.

About Mark Sabates

Mark Sabates CPA, is an EisnerAmper Audit Partner with experience in public and non-public company audits and initial public offerings, and an industry focus on technology, manufacturing and distribution.

Have Questions or Comments?

If you have any questions, we'd like to hear from you.