In these unprecedented times, preparers of financial statements need to consider the impact of Coronavirus (CV-19) on their reports. Companies with 2019 and 2020 year ends should evaluate how the pandemic impacts their business and how to communicate these impacts. The situation is changing on a daily basis and preparers should reflect on how best to adhere to the relevant financial reporting rules as well as communicate uncertainties in the financial statements and accompanying reports. Some of the relevant issues are explored below, using IFRS as the applicable financial reporting framework, but similar considerations would be relevant for other financial reporting frameworks including UK GAAP.
Conditions at the reporting date
Companies need to consider the timeline carefully to assess the conditions relating to CV-19 which existed at the reporting date i.e. the balance sheet date. For a reporting date of 31 December 2019, it is not likely that CV-19 would be considered a condition existing at the year end, as the identification of the virus happened in January 2020. However for companies with a reporting date in early 2020, depending on the timing of the reporting date, the impact of CV-19 could be an adjusting or a non-adjusting event.
If CV-19 is not considered to be an adjusting event, in accordance with IAS 10 adjustments should not be made to the measurement of assets and liabilities. However, non-adjusting events should be disclosed if they are of such importance that non-disclosure would affect the ability of users to make proper evaluations and decisions. The required disclosure is both the nature of the event and an estimate of its financial effect or a statement that a reasonable estimate of the effect cannot be made.
If CV-19 is considered to be an adjusting event, i.e. a condition existing at the reporting date, there could be numerous implications for the measurement of assets and liabilities, including but not limited to:
- Asset impairment – the impact of CV-19 on the business could be a trigger for impairment of assets which do not normally undergo impairment testing on an annual basis. The assumptions underlying impairment tests will need to reflect current conditions, including assessment of future cash flows.
- Asset valuations – changes may need to be made to reflect a variety of impacts, e.g. to write off inventory or to reflect the change in fair value of assets held under a revaluation model.
- Financial instruments – valuations may need to reflect credit losses on loans and the change in fair value of assets such as equity investments.
- Provisions – additional provisions may need to be recognised, e.g. in relation to onerous leases.
IAS 1 requires management to make an assessment of an entity's ability to continue as a going concern. If management has significant concerns about the entity's ability to continue as a going concern, the material uncertainties must be disclosed. In making this assessment, management should consider relevant current information and information about the future, looking at least 12 months ahead (note for entities reporting under UK GAAP, this is at least (but not limited to) 12 months from the date of approval of the financial statements and not just 12 months from the balance sheet date). Given the significant economic impact of CV-19 on a vast range of business sectors, many companies will need to be making disclosures relating to their material uncertainties in this year's financial statements.
If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis.
Outside the financial statements
In the UK, companies other than small companies have to produce a strategic report which should contain a discussion of principal risks and uncertainties. For companies with 2020 year ends, they will need to carefully consider how they provide useful information to stakeholders in relation to the impact of CV-19 on the business model, risk management and financial situation. The FRC has produced guidance on this element of the company report, which can be found here
In summary, financial statements and other information included in the annual report being prepared at this time or later in 2020 will need to carefully communicate the matters relating to CV-19. Further guidance is likely to be provided by the regulatory and professional bodies in due course.
Lisa Weaver is an author for accountingcpd. To see her courses, click here.