I have just recently starting working in a country that is about to adopt IFRS (2009) and was wondering if anyone had had experience with possible violations to debt covenants during the transition period. I am guessing that clients will have to communicate with their banks about the impact IFRS will have on their outstanding debt and request a document stating that the banks will request the payment on demand in the case of a violation.
I am not sure if clients have realized this potential impact of going to IFRS, but I would like to be prepared.
Thank you very much,
I have not experienced this yet, but this will be an issue for Canadian companies in 2011. If your client needs to use IFRS in 2009, I would recommend they begin discussing the potential impact on the Financial Statements (covenant issues and other) as soon as possible. It seems reasonable that a bank would renegotiate covenant terms in good faith if the change financial ratios is only driven by the accounting standards.
Here is a link with an article regarding your concern.
I agreed with Gordon in order to begin the discussions about the
potencial impact on the F/S that you’re going to face upon adoption of
I have not heard about any problems in this respect when my country adopted IFRS (EU adoption) but of course this adoption did not go overnight. Anyhow this aspect should be dealt with during the implementation phase of IFRS and if necessary or in case of doubt, discussed with the financial institutions. Also there is a solvency aspect in case of regulated industries, that normally is dealt with on industry level (think of Basel agreements etc.)
I WULD BE ABLE TO THROW MORE LIGHT IF YOU COULD LET US KNOW THE COUNTRY SO THAT WE CAN ALSO CONSIDER THE LOCAL GAAP
thanks so much
From my experience, auditors focus on changes over prior periods. They pay attention to any significant events and will request detailed back up to insure complete understanding. In addition, a standard practice is for them to test various items on the income stmt – meaning they want to see the underlying journal entries, invoices, etc… Some test all revenue and cost of goods and a significant operating expenses. Some will test only select items and go further if they uncover anything out of the ordinary.
Be prepared to produce all bank statements for the complete period. They will contact your bank to verify various txns. Be prepared to show documentation related to changes in Fixed Assets – also they will drill into the Depreciation and Amortization schedules.
The idea is for the auditor to feel comfortable that your financial stmts accurately reflect your financial position at that point in time.
What they actually do during an audit depends on your specific situation, what they are auditing, whether it is for a public or private company, etc…
Just remember, they are not your friend or enemy – they have a specific function to perform and must provide an objective opinion.
Hope this gives you a brief understanding of what you can experience.