Covenants and current versus non-current: what changed in practice

Short answer: Whether a liability is current turns on the rights you actually held at the reporting date, not on what you expect or what the bank agreed afterwards. Only covenants you had to meet on or before that date affect classification. Later covenants get disclosed instead. That single line moves real balances.

The rule in one sentence

A liability is non-current only if, at the end of the reporting period, the company has a substantive right to defer settlement for at least twelve months after that date.

Three words in that sentence do most of the work.

At the end of the reporting period. The test is a photograph, not a forecast. Everything that happens on 1 April onwards is a non-adjusting event, however helpful.

Substantive. A right that exists on paper but that the company could not actually use is not a right. If a rollover depends on the lender agreeing each time, there is no right to defer.

Settlement. Transfer of cash, other assets, goods or services, or the company’s own equity instruments. A conversion option that is classified as equity is ignored for this purpose, so an otherwise long-dated convertible does not become current just because a holder could convert.

Which covenants count, and which do not

This is the change that caught people out.

• A covenant that has to be complied with on or before the reporting date affects classification. If you failed it at the reporting date, and the failure gives the lender a right to demand repayment, the liability is current.
• A covenant that has to be complied with after the reporting date does not affect classification — even one tested three months later, and even if you already know you will fail it. Instead it is disclosed.

So a facility with a 31 March net-debt-to-EBITDA test is squarely in classification territory. A facility with a 30 June test is a disclosure matter at 31 March. The same ratio, in the same agreement, on two different testing dates, gets two different answers. Read the testing dates, not the ratios.

The waiver timing trap

The most expensive mistake is a real one, every year.

A term loan is breached at 31 March. The bank issues a waiver letter in May, before the accounts are approved, confirming it will not demand repayment. The loan is still current at 31 March, because the right to defer did not exist on that date. The waiver is a non-adjusting subsequent event: it gets disclosed, and it does not change the balance sheet.

The version that does work is a waiver, amendment or covenant reset agreed before the reporting date that gives an unconditional right to defer for at least twelve months from that date. The lesson for a controller is a calendar one. If a breach at year end is foreseeable, the negotiation has to conclude in March, not in May. That is a treasury deadline, and it belongs on the close plan.

What Indian facilities do that makes this harder

• Cash credit and working capital demand loans. Repayable on demand, or subject to annual review at the bank’s discretion. There is no right to defer, so these are current. Their classification rarely changes; what changes is the argument people try to make about them.
• Annual renewal with a sanction letter. A facility renewed each year by a fresh sanction is not a right to defer. The renewal is the lender’s decision.
• Term loans with quarterly covenant testing. The 31 March test counts. The 30 June test does not, but it is disclosable.
• Cross-default and cross-acceleration clauses. A breach on one facility can hand rights to lenders on others. Assess the whole book, not the facility in isolation.
• Loans with a subjective acceleration clause. A material adverse change clause that lets a lender accelerate at its own judgement needs a careful read on whether any right to defer is substantive.
• Group guarantees. A guarantee given by the parent can put a subsidiary’s borrowing into the parent’s assessment too.

The disclosure that replaces the reclassification

Where a liability stays non-current but is subject to covenants to be complied with within twelve months after the reporting date, the aim of the disclosure is that a reader can assess the risk of it becoming repayable within twelve months. In practice that means:

• the carrying amount of the liabilities concerned;
• information about the covenants, including when they are tested and what they require; and
• facts and circumstances that indicate the company may have difficulty complying — including, where relevant, that it would not have complied had the covenant been tested at the reporting date.

That last point is uncomfortable and is exactly what the disclosure is for. A company that keeps a loan non-current because the test is in June, while knowing the June test will fail, has to say so.

The circular problem nobody plans for

A reclassification from non-current to current does not stop at presentation. It reduces working capital and the current ratio. If another facility carries a current-ratio covenant, the reclassification can cause a second breach, which can cause a second reclassification. Model it before the numbers are locked, because discovering the loop during the audit leaves no time to act.

There are knock-on effects beyond the balance sheet as well: ratio disclosures required under Schedule III, credit ratings, the going concern assessment and the way the results read to an analyst.

The close checklist

• Build a facility register: lender, amount, maturity, every covenant, and every testing date.
• Mark each covenant as tested on or before the reporting date, or after it.
• Compute every reporting-date covenant on final numbers, not draft ones.
• For each breach, check what right the lender obtains and whether any pre-year-end waiver exists.
• Confirm whether every rollover right is substantive and unconditional.
• Check cross-default clauses across the book.
• Model the reclassification effect on ratio-based covenants before the numbers are final.
• Draft the covenant disclosure for the liabilities that stay non-current.
• Brief the audit committee early, because this one moves headline balances.

The requirements above follow the Ind AS 1 covenant and classification amendments, which came through the Companies (Indian Accounting Standards) Second Amendment Rules, 2025, notified in August 2025 and applying retrospectively to annual periods beginning on or after 1 April 2025. The notified text governs the exact wording. More on amendments and what each asks of a running close on the Ind AS updates hub.

Where FINAHQ fits

The failure mode here is timing: the covenant test needs final numbers, and final numbers arrive at the end of the close, when there is no room left to negotiate. FINAHQ plans the close, tracks it and carries each quarter into the next, so the facility register, the covenant computation and the disclosure sit on the plan as owned tasks with dates instead of being remembered late. See how close management works, calculate what a shorter close is worth, or talk to us.

This article is general information, not professional advice. Refer to the notified text and discuss your classification with your auditors.