With leases shifting to the balance sheet as liabilities, the standards may affect debt and loan covenants and creditor relationships.
With the new standards, you must include most leases on the balance sheet and report them as right of use assets and lease liabilities. Depending on the standard that applies to your organization, there are differences in the impact of how lease liabilities are classified on the balance sheet. The classification may increase the liabilities to the point where debt covenants may be impacted. For ASC 842, there may be minimal impact, since operating leases are considered operating liabilities, and not debt. However, in the approach that the IASB took for IFRS 16, it’s possible that lease liabilities might be classified as debt, which could affect the debt covenants. Debt covenants should be reviewed and possibly updated, or waivers may need to be obtained, given that lease liabilities are now on the balance sheet.
Assess the number and value of leases to be included on the balance sheet and determine the impact on financial ratios.
Assess the existing debt covenant thresholds and guidelines. Evaluate if there are any protections against changes to financial ratios due to shifts in standards.
Lenders need to assess the impact the standards will have on their customers. The lender’s staff needs to understand the standards and their requirements.