Coronavirus and its impact on financial reporting
As the COVID-19 pandemic evolves, this article summarises some of the areas to be considered by entities when producing their financial statements in this uncertain period.
The UK Regulatory body the Financial Reporting Council (FRC) is having regular discussions with the large accountancy bodies to monitor the impact that the COVID-19 outbreak might have on the publication of financial reports.
The FRC has already issued guidance for auditors who may be facing practical difficulties in their audits due to the COVID-19 pandemic.
For those preparing financial statements, some of the areas that may require additional consideration by corporates as a result of the pandemic include, but are not limited to, the following:
1. Revenue recognition – Under IFRS, revenue can only be recognised by an entity when the receipt of the related consideration is probable. For entities applying FRS 102, they should refer to the recognition criteria in Section 23 of that standard. COVID-19 might have an impact on customers’ ability to make such payments and therefore entities may need to consider writing off some of their outstanding balances.
2. Impairment of non-financial assets including goodwill – Entities may need to consider whether COVID-19 has resulted in asset impairment due to changes in estimated future generated cash flows and earnings. This may involve an impairment assessment of such assets in addition to that already required to be performed on at least an annual basis under both IFRS and UK GAAP.
3. Financial instruments – Under IFRS 9 Financial Instruments, COVID-19 might have an impact on an entity’s Expected Credit Losses (ECL) as borrowers may experience difficulties meeting their financial obligations. ECL include trade receivables and loans as well as the losses anticipated in relation to the measurement of loan commitments and financial guarantees. The amount and timing of these losses will require a significant amount of judgement.
4. Stock and inventory – Under IFRS, these items are valued at the lower of cost and net realisable value. FRS 102 requires that inventories are measured at lower of cost and estimated selling price less costs to complete and sell. These approaches to stock valuation are generally viewed as comparable. In a volatile market, these measurements may require further consideration.
5. Events after the end of the reporting period – Entities are obliged to consider whether events that have occurred after the end of the reporting period have had an impact on the financial results if they become aware of these before the financial statements are issued. If such events represent circumstances that existed at the balance sheet date, then an adjustment must be made to the appropriate balances. If the entity determines that the circumstances did not exist at the balance sheet date, these are considered non-adjusting events but, if material, sufficient disclosure about the nature of the event, accompanied by an estimate of the financial impact, should be included in the financial statements.
6. Breach of covenants – The current uncertain trading conditions may result in some entities breaching their financial covenants. These entities should consider whether such a breach might result in a change of the timing of any related liabilities; for example, if they become repayable on demand and, as a result, their presentation in the financial statements as current or non-current liabilities.
7. Going concern – An entity’s financial statements must be prepared on a going concern basis unless management intend to cease trading or liquidate the entity or has no other alternative but to do so. For example, entities preparing their financial statements to 31 December 2019, that have been severely affected by COVID-19, may need to consider whether the going concern basis remains appropriate despite the impact not occurring until after the year end. Any material uncertainties relating to going concern should also be disclosed in the financial statements.
ICAS will continue to monitor the situation with regard to COVID-19 and issue further guidance and information to members as required.