Indus Precision: Covenant Breach, Post-Year-End Waiver and Going Concern

Rule. IAS 1.74 requires that if an entity breaches a provision of a long-term loan arrangement on or before the end of the reporting period, with the effect that the loan becomes payable on demand, the liability is classified as current - even if the lender agreed after the reporting date not to demand payment. The liability is non-current only if the lender agreed by the end of the reporting period to provide a grace period ending at least twelve months after the reporting date.

Application. The breach occurred on 31 December 2025 and the waiver is dated 12 January 2026 - after the reporting date. The waiver also expires on 30 June 2026, which is not twelve months after 31 December 2025. Both limbs of the exception fail. The Rs 2,500 million loan is current at 31 December 2025.

Adjusting or non-adjusting? The breach is the condition that existed at the reporting date and drives the classification. The waiver is new information about how the lender chose to respond - a non-adjusting event under IAS 10.9, disclosing the nature and financial effect under IAS 10.21. It affects the going concern assessment (IAS 10.14-16) but does not retrospectively create a right to defer settlement that did not exist at year end.

Consequences. Reclassifying Rs 2,500 million from non-current to current changes the current ratio dramatically, increases the current liabilities figure already negative by Rs 610 million to roughly Rs 3,110 million, and is likely to trigger a second covenant test on other facilities. The proposed wording that 'the loan was refinanced' is factually wrong - a six-month covenant waiver is not a refinancing - and would itself be a material misstatement requiring correction before the audit report is signed.

Assess the evidence, not the assertion. Four factors point to a material uncertainty:

1. The waiver expires within six months of the reporting date, after which the loan is on demand.
2. Headroom of Rs 40 million is 1.6% of the term loan and is wiped out by a revenue fall of less than 1% (a 5% fall consumes Rs 310 million).
3. Both mitigating items - the Rs 1,500 million refinancing and the Rs 400 million land sale - are unagreed; a forecast that depends on uncommitted financing is not a realistic basis.
4. The company is loss-making with a Rs 610 million working capital deficit.

Conclusion. A material uncertainty related to going concern exists. The going concern basis may still be appropriate if management's plans are at least plausible and disclosure is full.

If disclosure in the financial statements is adequate: an unmodified opinion with a separate section headed 'Material Uncertainty Related to Going Concern' placed immediately after the Basis for Opinion, cross-referring to the relevant note, stating that the auditor's opinion is not modified. It must not be squeezed into an emphasis of matter paragraph (ISA 570 Revised).

If disclosure is inadequate - for example the single sentence claiming refinancing, with no mention of the waiver expiry, the unagreed refinancing or the sensitivities: qualified opinion on the grounds of material misstatement of disclosures; escalate to adverse if the disclosures are so misleading that they contradict the financial statements as a whole. If the going concern basis is judged inappropriate, the opinion is adverse and the basis of preparation must change.

Also required: communication with those charged with governance (ISA 260), a key audit matter if IPL is listed, and consideration of the need to highlight the covenant reclassification as a separate matter given its effect on the current ratio.

Procedures on the covenant and facility.

1. Obtain the original facility agreement, all amendments and covenant calculations; recompute the 4.6 ratio from audited figures and agree it to the compliance certificate submitted to the bank.
2. Obtain the waiver letter, verify its date, scope, expiry and signatories, and confirm directly with the bank that no other waiver, standstill or amendment exists.
3. Review board and treasury minutes from December to March for any discussion of refinancing or asset sales.

Procedures on the forecast. 4. Test the mechanical integrity of the model and agree the opening cash position to the bank statements and the cash flow statement. 5. Challenge each assumption: the revenue build-up against order books and post-year-end management accounts; the Rs 1,500 million refinancing against term sheets, credit approvals and lender correspondence; the Rs 400 million land sale against valuation reports, board approval and any offer letters. 6. Perform sensitivity and reverse stress testing - establish what fall in revenue or what delay in the land sale eliminates headroom, and ask management what it would do then. 7. Extend the assessment period to at least twelve months from the date the financial statements are approved, not from the reporting date.

Are the assumptions acceptable? No, not as presented. An assumption about financing that has not been agreed and about a sale for which there is no binding offer cannot be treated as a realistic outcome; it is a hope, not a plan. The forecast must either exclude both items - in which case headroom is negative - or present them as clearly labelled sensitivities with the downside scenario disclosed.

Before signing. Obtain written representations covering the completeness of the waiver, the status of the refinancing and the land sale, and the reasonableness of the forecast. Report to those charged with governance the going concern conclusion, the covenant reclassification and the fact that management's original draft was misleading.