DSCR in the audit file
Debt service coverage is the covenant auditors test most often. A breach affects both measurement and presentation: callable debt may need to be presented as current under ASC 470-10-45-11, the notes must disclose it, and a breach without a waiver is a condition to consider in the going concern evaluation under AU-C 570.
There is no GAAP definition of DSCR, so this calculator offers the three common bases and shows each step. Recompute with the agreement's exact wording: which add-backs are allowed, whether capex and distributions are deducted, the measurement period (trailing twelve months is typical) and whether lease payments count as debt service.
Common questions
What is the DSCR formula?
DSCR = cash flow available for debt service ÷ debt service. Cash flow is usually EBITDA for an operating company or net operating income for real estate; debt service is scheduled principal plus interest (and lease payments if the agreement includes them).
What is a good debt service coverage ratio?
Lenders commonly require at least 1.20x to 1.25x for commercial loans; the minimum is set in each credit agreement (SBA programs publish their own). A DSCR below 1.0x means cash flow from operations does not cover scheduled payments.
Is DSCR calculated on EBITDA or net operating income?
It depends on the loan. Operating-company covenants usually start from EBITDA, sometimes less unfinanced capex and cash taxes. Real estate loans use net operating income. Always use the definition in the credit agreement.
What happens if a company breaches its DSCR covenant?
The lender may be able to call the debt. Under ASC 470-10-45-11, long-term debt callable at the balance sheet date is classified as current unless the lender waives the right for more than one year. The auditor also considers the effect on going concern under AU-C 570.
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