Directors should be able to identify the next borrowing covenant test, explain the calculation and show the evidence supporting compliance. A covenant calendar brings those obligations into the normal board reporting process. It is particularly useful where a group has several facilities, different testing dates or agreements that have changed over time.
The calendar should connect the signed agreement to the calculation, the review and any required communication with the lender. It should also show the action needed if headroom becomes limited. Responsibility for assessing the company’s position remains with directors; an audit provides independent evaluation of the relevant evidence.
The FRC’s Annual Review of Corporate Reporting 2025/26 highlights covenant disclosure issues, including compliance dates and explanations of resets or waivers. Its detailed recommendations relate to IFRS reporting. This article focuses on the practical evidence that directors can organise more widely. The financial reporting consequences must be assessed under the framework and contractual terms applicable to the company.
Identify every relevant obligation
Start with a complete record of borrowing facilities and the legal entities responsible for them. Obtain the current signed agreements and any amendments or side letters. A summary prepared when the loan began may no longer describe the terms that apply.
For each agreement, distinguish repayment dates from financial covenant testing dates and reporting deadlines. An obligation to submit a certificate may fall after the date at which the financial position is tested. Both dates need an owner. Other conditions may also require attention, such as restrictions on additional borrowing or distributions, depending on the agreement.
Do not rely on the relationship manager’s usual practice as a substitute for understanding the documents. If the meaning or legal effect of a provision is unclear, resolve it with appropriate advice. The calendar records the obligations; it cannot settle an uncertain interpretation by itself.
Use the definition in the agreement
A covenant calculation may use a defined measure of earnings, debt or cash that differs from the label in the management accounts. Adjustments may be permitted, restricted or subject to agreement. The relevant entity or group boundary may also differ from the reporting pack normally reviewed by directors.
Prepare a calculation that starts with reliable accounting information and shows each adjustment separately. Cross-reference the definition used. Explain judgemental adjustments and keep supporting evidence. This makes the calculation easier for management to review and reduces the risk of a favourable assumption being carried forward without challenge.
Consistency matters when comparing periods. If the accounting basis, business structure or contractual terms change, assess whether the calculation needs to change as well. Do not assume that an increase in reported earnings automatically creates additional covenant headroom. The agreement determines how the measure is calculated.
Show the available headroom clearly
Directors need to understand the space between the calculated result and the contractual limit. Present the actual measure, the limit and the difference in a form that makes sense for that covenant. Avoid reporting “compliant” without the calculation or explaining whether the position has become tighter.
For example, a maximum debt-to-earnings ratio of 3.0 times and a calculated result of 2.4 times gives a difference of 0.6 times. That is not £0.6 million of available borrowing. Any assessment of additional debt capacity would need to follow the agreement and consider other restrictions, cash requirements and lender approval.
This is an illustration of presentation, not a suggested lending limit. A business can meet one financial covenant and still face other constraints. The board should understand which conditions matter and how they interact before committing to an acquisition, distribution or further borrowing.
Separate the completed test from the next forecast
Keep the calculation for the completed testing period distinct from management’s assessment of the next one. The first should be supported by the relevant actual financial information. The second depends on assumptions about future trading, borrowing and cash flows.
Where the next test looks tight, identify the specific factor causing the pressure and the time available to respond. That may be a trading shortfall, a delayed receipt or a commitment already made. Use the forecast to explain the decision and timing rather than to provide a general reassurance that performance is expected to improve.
Agree who will monitor the position between board meetings and what change triggers escalation. If a financing discussion may be needed, directors should know when it must begin and what information the lender will require. The ability to forecast a problem does not establish that the lender will amend the terms.
Keep evidence of changes and waivers
If terms have been reset or a waiver has been obtained, retain the relevant documentation and identify precisely what it covers. Record the entity, facility, condition, period and any conditions attached. A discussion about a possible concession is different from a documented agreement.
Check whether further action is required and whether another test or certificate remains due. Avoid describing an entire facility as resolved when only a particular condition or testing period has been addressed. The board report should make any remaining exposure visible.
The timing and wording of lender agreements can affect financial reporting. Ask the accounts preparer to assess the relevant treatment and disclosures under the applicable framework, using the actual evidence. The auditor then evaluates those conclusions independently. A waiver should not be assumed to remove every reporting issue without that assessment.
Assign preparation and review responsibilities
The calendar should state who prepares each calculation, who reviews it and who is authorised to communicate with the lender. In a smaller finance team, these roles may be concentrated, but the responsibility for checking definitions and evidence still needs to be explicit.
Build in enough time for queries before the lender’s submission deadline. A calculation completed on the due date leaves little scope to resolve a disagreement over an adjustment or obtain missing information from another group company. The board should receive a concise explanation of material issues and the proposed response.
For audit preparation, make the current agreements, calculations and correspondence available together. Identify changes since the previous year and explain the management assessment. The auditor may need further evidence or clarification; an organised record helps that work begin from a common factual base.
Use one record that the board can follow
A practical covenant record can contain the borrower and facility, the relevant condition, the test date, the reporting deadline, the calculation owner and the reviewer. Alongside these, show the result, limit, headroom, supporting documents and any unresolved action.
Keep the detail available behind the summary. Directors do not need every supporting schedule reproduced in the board pack, but they should be able to understand the conclusion and obtain the evidence without rebuilding the history of the facility.
At the next board meeting, ask for the next testing date, the person responsible and the latest assessment of headroom. Where any of those is unclear, assign an action and completion date. That is a practical step towards better control of borrowing obligations and a clearer audit process.
Source and context
FRC Annual Review of Corporate Reporting 2025/26 published 29 September 2026.
Published 29 September 2026, covering the monitoring year ended 31 March 2026. The detailed covenant reporting observations concern IFRS. Accendo’s evidence-management recommendations do not assert identical disclosure requirements under FRS 102.