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Danger of IFRS for banking covenants

There may be yet another impact of IFRS that financial directors are not paying enough attention to. According to PricewaterhouseCoopers' business recovery team, the impact of IFRS from next year on European corporates' banking covenants is being widely ignored.

When compliance with IFRS becomes compulsory for European listed companies from January next year, many will face increased volatility in their accounts ? something that has already been stressed as regards hedge accounting and communication with shareholders. But the affect of IFRS on banking covenants is relatively unknown.

The volatility in reported revenues will affect earnings before interest tax, depreciations and amortisation as well as net worth, all measures that have historically been used as the basis for financial covenants. Compliance with IFRS from next year risks breaching those covenants.

Brian Lochead at PwC said: ?Companies need to analyse how covenants will be impacted by IFRS, which covenants are no longer appropriate and build in additional headroom to deal with anticipated additional volatility and uncertainty. We recommend that companies ensure that their existing covenants include sufficient headroom to accommodate the resulting volatility arising from IFRS.?

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