- Posted by Sanjeev Kamra
- On July 19, 2011
- 0 Comments
Do you have banking covenants, if so, are you aware of the impact the new accounting standards for private enterprise will have on those banking covenants? If not, now is the time to start thinking about it and have discussions with your bank and your assurance provider.
On January 1, 2011, all for profit enterprises, that are not public, were required to adopt either International Financial Reporting Standards (“IFRS”) or Accounting Standards for Private Enterprise (“ASPE”). The majority of organizations have likely chosen to adopt ASPE because it allows some of the same accounting policy choices they may have used under differential reporting.
However, when you were making this choice did you review your banking agreement? If not, now is a good time to review how the agreement defines “Generally Accepted Accounting Principles”. If it is unclear, I would recommend a call to the bank to clarify that ASPE meets their requirements.
It is important to understand that the adoption of ASPE will mean some changes to your accounting policies and the presentation of your financial statements which in turn, could impact the calculation of typical covenant ratios such as your “Current Ratio” or “Debt to Tangible Net Worth”.
Also consider that upon transition, ASPE allows a company a one-time opportunity to make certain accounting policy choices. For example, you can choose to account for income taxes by using either the future income tax method or the taxes payable method. Since the choices you make will impact the calculation of your covenants, I recommend that once you have made your accounting policy choices, you have an upfront discussion with the bank regarding the impact on your financial statements.
If you are required to report your covenants to the bank on a quarterly basis, the impact of these choices/changes need to be discussed now. If you report your covenants annually, the summer presents an excellent time to work with your assurance provider to understand ASPE and make progress on your transition plan.
For more info on your Toronto area Accountant or other business / financial services needs, call 905-216-2445, click email@example.com or visit www.vnaccountingsolutions.com.