Are you familiar with ASC 842 and how it affects credit agreements? As a professional, I am here to break it down for you.
ASC 842, or the Accounting Standards Codification Topic 842, is a new leasing standard that requires companies to recognize all leases on their balance sheets. This includes both operating and finance leases, which were previously recorded differently.
What does this mean for credit agreements? Well, credit agreements often contain covenants that are based on a company`s financial ratios, such as debt-to-equity or interest coverage. With the new lease standard, the balance sheet will reflect higher liabilities, which could impact these financial ratios and potentially trigger a default under the credit agreement.
To avoid this, companies may need to negotiate with their lenders to amend the covenants or obtain waivers. They may also need to disclose the impact of ASC 842 in their financial statements and footnotes.
It`s important to note that ASC 842 only applies to leases, not other types of agreements like service contracts or licenses. However, it`s still important for companies to consider the impact on their financial statements and credit agreements.
In conclusion, ASC 842 is a new leasing standard that affects how companies record leases on their balance sheets. This can impact financial ratios and potentially trigger defaults under credit agreements. Companies should be aware of the impact and take necessary steps to mitigate any negative effects.