Financial covenant and Primary financial statements: Difference between pages

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''Loan documentation. ''
''Financial reporting.''  


A clause in a loan agreement that commits the borrower to operate within predefined financial constraints.
Under International Accounting Standards (IAS) 'primary' financial statements are the main accounting statements that must be presented.  


Its purpose is to impose a level of financial discipline on the borrower such that the borrower acts within the limits imposed by the constraints. The clause also aims to prevent the borrower from acting in a manner that is likely to reduce credit worthiness during the time period that the loan is outstanding.


For example, an interest cover covenant might state that interest cover will be no less than 3 times; the borrower promises that the ratio will always exceed the set figure.
These are:


Financial covenants are tested at certain pre-determined intervals; annually, in the above example.
* Statement of financial position (balance sheet).
* Income statement (profit or loss account), which can be included in the statement of comprehensive income.
* Statement of comprehensive income.
* Statement of changes in equity.
* Statement of cash flows.




Commonly used financial covenants on loan agreements, in addition to minimum interest cover, include;
The primary financial statements are supported by Notes to the accounts, providing additional and more detailed financial information.


1. Minimum tangible net worth – as this is a measure of solvency


2. Ratio of maximum borrowings to tangible net worth – to preserve the level of solvency
==See also==
* [[Entity]]
* [[Financial reporting]]
* [[Income statement]]
* [[International Accounting Standards]]
* [[Notes]]
* [[Statement of cash flows]]
* [[Statement of changes in equity]]
* [[Statement of comprehensive income]]
* [[Statement of financial position]]
* [[Statement of profit or loss and other comprehensive income]]


3. Net or gross debt to EBITDA (times) – measure of liquidity
[[Category:Accounting,_tax_and_regulation]]
 
[[Category:Compliance_and_audit]]
4. Ratio of current assets to current liabilities, and minimum level of working capital – which are other measures of liquidity
 
5. Limitations on payment of dividends as a ratio of earnings – to preserve net worth
 
 
Breach of a financial covenant would normally constitute an event of default.
 
 
== See also ==
* [[Contract]]
* [[Covenant]]
* [[Event of default]]
* [[Frozen GAAP]]
* [[Headroom]]
* [[Interest rate risk]]
* [[Loan agreement]]
* [[Translation risk]]
 
[[Category:Treasury_operations_infrastructure]]

Revision as of 15:57, 5 May 2019

Financial reporting.

Under International Accounting Standards (IAS) 'primary' financial statements are the main accounting statements that must be presented.


These are:

  • Statement of financial position (balance sheet).
  • Income statement (profit or loss account), which can be included in the statement of comprehensive income.
  • Statement of comprehensive income.
  • Statement of changes in equity.
  • Statement of cash flows.


The primary financial statements are supported by Notes to the accounts, providing additional and more detailed financial information.


See also

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