These six questions can be used by boards to highlight COVID-19 risks, inform key decisions and ensure the financial statements properly reflect the impact of the pandemic.
What lines of business are currently not viable?
While some business lines may have strong prospects to return to profitability, others could have an uncertain future.
Firstly, agree which measure is key in assessing viability eg, cashflow, profits or EBITDA. The same measure may not be appropriate for all business activities. Then specify the period over which viability is being assessed. Too narrow a focus could lead to short-sightedness.
Think about how you will make sure decisions are not biased by the current situation eg, the rules relating to restaurant and pub closures have varied under each lockdown. Thought should also be given to how the organisation’s lines of business are defined and reported, appreciating that these might be quite different to what they were 12 months ago eg, retailers with new or enhanced online channels.
What government financial support has been received?
Many businesses will have received financial support from governments, in one form or another. While some businesses will have clearly tracked support, in larger groups multiple businesses may have accessed different schemes. There may not be overall visibility around support received and incremental management reporting may be necessary.
What assets are being used less?
Many businesses will have assets currently unused, or used less, during the pandemic. While the assumption may be that use will return to normal, it may not yet be clear how these assets will be used in the future business model. They might be obsolete, used less or differently, or ‘sweated’ to recover capacity lost. Businesses may have plans in place – but how deeply are these reflected in financial projections, budgets and accounts?
The reduction in asset use might provide an opportunity to improve, upgrade or overhaul them, increasing opportunities and reducing risk. The board might want to consider how underutilised assets could be redeployed to support charities or local communities.
What contract obligations might you not honour?
Many businesses will have contracts they were prevented from completing or chose not to complete. In normal times a business might not give much consideration to the risk of not honouring its contracts unless difficulties emerge later. During the pandemic, with normal activities interrupted or suspended, the situation has been very different. It may not be clear whether contracts will subsequently be completed or whether one party will walk away.
Difficult decisions may be needed. Financial impact, risks and other consequences will vary not only between contracts, but also whether the contract concerns a customer, supplier, lender or employee. Consequences for the business’ reputation and goodwill will vary and may be uncertain.
What contract rights might you not enforce?
A business may also have suppliers who have not performed on contracts. The supplier may not be able to deliver or may have chosen not to. Equally, the business may no longer want those goods or services. A business may have been given access to services it couldn't use during lockdown. It may be ambiguous whether a service was actually provided. Equally, the business may wish to honour the contract to preserve access, other rights or support the supplier.
Some contractual rights may be affected by government action – the requirement to offer repayment holidays lasting up to six months for UK mortgage holders is one example. Identifying these, their duration, and any proposed changes could help determine whether the business has room to relax other contract rights.
Why do the accounts matter?
The preparation of financial statements is an opportunity to communicate with stakeholders about how the business has managed through the pandemic and about its future prospects. Decisions about investment, lending and potentially remuneration are linked to the annual accounts. Bank covenants are a key example. Understanding what decisions, processes and contracts the accounts affect is key and should be considered as early as possible in the process.
Six questions: flowchart
View and print our flowchart of the six business questions and accounting consequences.
Six questions: accounting consequences
Read more on the accounting consequences for 2020/21 year-ends.