Firms are at risk from long-term borrowing covenants, according to accountancy and investment management group, Smith & Williamson.  

Under both International Financial Reporting Standards (IFRSs) and UK GAAP, if a firm finds that it is in breach of its loan covenants at the year-end it is likely that it will be required to reclassify all of those long-term borrowings as current liabilities.  

Smith & Williamson adds that obtaining a waiver from the lender in relation to the breached covenant. However, this must be in place prior to the accounting year-end and will need to cover the year from the balance sheet date.

Guy Rigby, head of entrepreneurs at Smith & Williamson, says: “With the current economic downturn, this is a potential time bomb. Companies in breach of long-term borrowing covenants may find their balance sheets severely weakened. In some cases this may affect their ability to continue trading”.