Loan Performance Could Worsen Under New Lease Accounting Standards

Transitioning to the new lease accounting standards, ASC 842, has been an operational challenge for many companies, but now it could effect loan performance. With the new ASC requirements including operating leases on company balance sheets, companies need to reevaluate their loan covenants to ensure they still meet the performance measures to avoid going into default.

First and foremost, Partner Patrick Farrelly said companies need to correctly determine debt contract provisions by reviewing the underlying documents for GAAP-freeze clauses, which facilitates projections of changes to the relevant metrics and debt covenant. The next step is for CFOs to start working with the organization’s bankers so both parties are in sync over the changes’ impact, he recommended.

Public company lenders have already gone through a similar process, so Farrelly said these recent changes should not prove to be new territory for them. And it’s very unlikely that a lender would dissolve a relationship with a good customer and call in a loan due to a technical default caused by a change in accounting principles, he noted. “What I've seen from my standpoint is people working together to try to make sure that both sides are happy and that everybody comes out with the original agreement and the emphasis of the original agreement,” Farrelly said.

Read the full article published by CFO Dive.