COVID-19: Accounting for and auditing revenue
11 May 2020: ICAEW’s Audit and Assurance Faculty has produced a webinar looking at accounting for and auditing revenue during COVID-19, which also tackles questions on issues such as FRS 102 recognition criteria and client internal controls.
Whether an event is adjusting or not depends on whether the condition existed at the balance sheet date. Conditions regarding COVID-19 are not considered to be adjusting for December 2019 year-ends, but may start to be for February and March year-ends. Remember though that if the going concern status of an entity is affected by something after the year-end this is always an adjusting event (further guidance is available here).
Charities face some particular challenges and they may be impacted in areas such as:
- Recognition of grants, which may be delayed if receipt of income is not yet considered probable, or there is uncertainty over measurement.
- Contract income recognition, as discussed above, if the charity charges for services/goods.
- Going concern: with the cancellation of fundraising events and other falls in donation, charity shop, grant and contract income, going concern assessments will be affected.
Audit considerations relate to ensuring that the accounting treatment is appropriate and there is sufficient appropriate evidence. Areas creating new or changing issues include:
- Internal controls: are normal systems still working or have some of the risks and associated controls changed?
- Documentation: whilst always essential, sufficient documentation of issues such as judgements made, significant risks or rebuttal of presumed risks will be needed.
Other areas of charity auditing which may be affected, depending on the income mix of the charity, include provisions and auditing of stock.
- “Kitchen sink” accounting, where clients attempt to over-provide for potential losses. While financial statements should not be over-optimistic, they should also not be over-pessimistic, and strict rules govern the recognition of provisions. Trustees’ reports should be “fair, balanced and understandable”.
- Year-end stock counts: These might be challenging or impossible. Rollbacks might be possible, especially if a client is mostly “moth-balled”, but new risks emerge.
The webinar then turned to address a number of frequently-asked questions, which included:
- Under IFRS 15, understanding of contract terms is key before revenue is recognised.
- Where a business sells goods with a right of return it is important to ensure there is a reassessment of likely returns.
- Where discounts are offered they should be considered in the measurement of revenue.
- Where revenue controls are no longer effective, a wholly substantive approach may be needed.
- Recoverability of debtors will be a much bigger issue than usual and may impact going concern.
Finally, the session pointed to a number of broader considerations.
The risks posed might change in different ways for different businesses, and limitation of scope audit opinions might be needed for some. As always, scepticism continues to be vital!