ABC Ltd. has a loan of ₹ 20 crore that is contractually repayable on 31 March 20X6. The loan agreement contains the following covenants relating to…

(a) Classification of the loan as at 31 March 20X1: The loan should be classified as a non-current liability as at 31 March 20X1. The reason is that the covenant requiring a working capital ratio of at least 1.20 is tested on 31 March 20X1, i.e., on the reporting date. ABC Ltd. has a working capital ratio of 1.30 on that date and therefore complies with the covenant. Accordingly, ABC Ltd. has the right to defer settlement of the loan for at least 12 months after the reporting date, subject to the requirements of Ind AS 1. (b) Effect of the covenant to be tested on 30 September 20X1: The covenant requiring a working capital ratio of at least 1.50 is tested on 30 September 20X1, which is after the reporting date. Under the amendment in Ind AS 1, covenants that an entity is required to comply with after the reporting date do not affect the classification of the liability as current or non-current at the reporting date. Therefore, even though management expects the working capital ratio to be only 1.40 on 30 September 20X1 and consequently expects to fail the covenant, the loan will continue to be classified as non-current as at 31 March 20X1. (c) Disclosure relating to the future covenant: Although the future covenant does not affect classification, ABC Ltd. is required to provide disclosures that enable users of the financial statements to understand the risk that the liability could become repayable within 12 months after the reporting date. The disclosure should include information about: the covenant requiring a working capital ratio of at least 1.50 on 30 September 20X1; the fact that the company expects to fail this covenant; and the fact that failure would result in the loan becoming repayable on demand. A suitable disclosure could be: "The loan of ₹ 20 crore, classified as a non-current liability, is subject to a covenant requiring the Company to maintain a working capital ratio of at least 1.50 as at 30 September 20X1. Based on the Company's current forecasts, the working capital ratio is expected to be 1.40 on that date. Consequently, the Company expects not to comply with the covenant, which could result in the loan becoming repayable on demand within 12 months after the reporting date.” (d) Consequence if the actual working capital ratio is 1.40 on 30 September 20X1: If the actual working capital ratio on 30 September 20X1 is 1.40, ABC Ltd. will fail to meet the required ratio of 1.50. Consequently, under the terms of the loan agreement, the lender will have the right to demand immediate repayment of the loan. However, this does not retrospectively change the classification made at 31 March 20X1. The loan was appropriately classified as non-current at that reporting date because ABC Ltd. had complied with the covenant applicable on 31 March 20X1. The failure on 30 September 20X1 would be relevant to the financial statements for the subsequent reporting period, subject to the applicable requirements of Ind AS 1.