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How Will New Accounting Standards Affect Bank Covenants?

Big changes are coming to several accounting standards that could impact a borrower’s ability to comply with bank covenants. In particular, changes in the way leases are treated under the new accounting standards could potentially have a major impact on compliance.  The new accounting standards are due to be implemented by December 15, 2018 for public business entities and December 15, 2019 for all other entities.  However, companies may look to adopt these standards early and banks should be aware of the impact the changes in a borrower’s accounting may have on compliance with bank covenants. Banks should be proactive and start reviewing its covenants now in order to determine how the calculation of its covenants could be affected. Some preventive action by lenders can result in smoother sailing in the months ahead as these new standards are implemented by borrowers.