Coronavirus: The financial reporting implications under IFRS
As COVID-19 continues to spread and more information comes to light about the nature of the virus and its impact, companies with 2019 and early 2020 year-ends need to consider how it affects their business and how the effects should be reported in the accounts. This guide is aimed at those entities preparing accounts in accordance with IFRS or the IFRS for SMEs.
This ICAEW Know-How article was created by the Financial Reporting Faculty.
An entity that is severely affected by the COVID-19 virus may need to consider additional disclosures of any material uncertainties which cast significant doubt over its ability to continue as a going concern. In some circumstances it may be necessary to consider whether it is appropriate to prepare the accounts on a going concern basis (IAS 1.25).
When assessing whether the going concern assumption is appropriate, management must take into account all available information about the future, which is at least, but not limited to, 12 months from the end of the financial reporting period.
This is relevant for both 2019 and 2020 year-ends.
Reflecting conditions which existed at the end of the reporting period
The general requirement is that the statement of financial position reflects the position at the end of the reporting period (IAS.1.10).
31 December year-ends
As at 31 December 2019 China had alerted the World Health Organisation (WHO) of several cases of an unusual form of pneumonia in Wuhan. However, substantive information about what has now been identified as coronavirus (or COVID-19) only came to light in early 2020. Therefore, for companies with a 31 December 2019 year-end, the emergence of coronavirus is generally considered to be a non-adjusting event.
As we progress through 2020, more information is coming to light on the scale and impact of coronavirus, and companies with early 2020 year-ends will need to consider the timelines more carefully to assess the conditions which existed at the end of the relevant reporting period.
There may be a greater degree of judgement required when identifying the conditions at the end of the reporting period, and therefore assessing whether the developments are adjusting or non-adjusting.
Non-adjusting events after the reporting period
When the emergence and spread of the COVID-19 virus is not considered to provide more information about conditions that existed at the end of the reporting period, the measurement of assets and liabilities in the accounts should not be adjusted for its potential impact (unless the impact is so far reaching that the entity is no longer considered to be a going concern). Although estimating future cash flows is often relevant when, for example, testing inventories, debtors and other assets for impairment, such estimates should nonetheless be based on what could have reasonably been known at the end of the reporting period.
The nature of any material non-adjusting event and an estimate of its financial effect must be disclosed by way of note (IAS 10.21). Therefore, directors will need to consider the impact of the COVID-19 virus on the business, which will vary according to the specific circumstances in which it operates. This assessment may involve considering the impact of the virus in the countries in which it operates, on the supply chain and the broader impact on the global economy, for example customer confidence, future buying intentions and their ability to pay.
Adjusting events for conditions existing at the end of the reporting period
When it is determined to be an adjusting event, a business will need to review all areas of the accounts that are subject to judgement and estimation uncertainty that might be adversely affected by the COVID-19 virus.
In a typical business, most assets are measured at cost or amortised cost. However, when the income or benefits the asset is expected to generate (ie, its recoverable amount) are lower than its carrying value, based on conditions that existed at the end of the reporting period, the asset is impaired and must be written down.
There are specific requirements in IFRS which address how and when to test for impairment (see IFRS 9 for financial instruments, IAS 40 for investment property held at cost, IAS 36 for assets such as plant and machinery, goodwill and other intangibles and IAS 2 for inventories). Fair value measurements of, for example, investment property and financial instruments such as derivatives, will need to be reviewed to ensure the values reflect the conditions at the end of the reporting period. When reviewing whether it is probable that a deferred tax asset will be recoverable, the entity will need to consider the implications of any downturn in profitability.
Some right-of-use assets arising, for example, under lease contracts associated with retail space or transport might now be impaired. The right-of-use assets under these lease contracts will therefore be subject to impairment testing under IAS 36.
Other areas of the accounts that are dependent on valuations and estimates include, but are not limited to, share-based payments, pension obligations, fair value of pension assets and tax.
Another area to consider is the impact on revenue contracts, for example, if an entity has long-term sales contracts in progress at the year end and there are significant changes in circumstances for customers, some sales contracts might now need to be renegotiated or might even cease to be valid under IFRS 15 (eg. the collectability requirement in IFRS 15.9(e)).
An entity must disclose key assumptions about the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities in the next financial year (IAS 1.125).
Post reporting period review
Events after the end of the reporting period include all events up to the date when the financial statements are authorised for issue (IAS 10.3). It is important to incorporate a comprehensive post reporting period review in the year-end reporting plan, particularly as information about the scale and the impact of the virus changes frequently. WHO issues regular updates on the virus.
Other reports accompanying the financial statements
Some companies will need to consider whether to refer to the possible impact of coronavirus in the narrative reports that accompany the financial statements, including information about principal risks and uncertainties. When mitigating actions can be taken, these should also be reported alongside the description of the risk itself.
In those circumstances when such disclosure is not required, it may nonetheless be useful to provide information above the minimum required by law as it may be of interest to stakeholders such as customers, lenders or suppliers.
IFRS for SMEs standard
The recognition and measurement requirements for those entities applying the IFRS for SMEs standard are broadly similar to those outlined above. Relevant sections include Section 3.8 and 3.9 on going concern, Section 16 Investment Property; Section 21 Provisions and Contingencies and Section 27 Impairment of Assets. Sections 11 and 12 address financial instruments but note that the IFRS for SMEs does not reflect the requirements of IFRS 9. The IFRS for SMEs also doesn’t reflect IFRS 16 and so entities might need to think about whether lease contracts have become onerous.
While the IFRS for SMEs includes less extensive disclosure requirements, it still requires key sources of estimation uncertainty to be disclosed (Section 8.7) and the requirements of Section 32 Events after the End of the Reporting Period mirror those in IAS 10.
The hub includes:
- Bitesize Briefing: Accounting for COVID-19 support schemes
- Coronavirus: The financial reporting implications of Coronavirus under UK GAAP – this guide is aimed primarily at entities with 2019 year end
- Coronavirus: Checklist: implications of COVID-19 on the preparation of accounts under FRS 102 – this guide is aimed primarily at entities with 2020 year end
- Checklist: implications of COVID-19 for the preparation of micro-entity accounts (FRS 105)
- Bitesize Briefing: Accounting for COVID-19 support schemes
- Bitesize Briefing: COVID 19 and post balance sheet events
- Coronavirus: How to distinguish adjusting from non-adjusting post balance sheet events – this guide is aimed primarily at entities preparing accounts under FRS 102
ICAEW coronavirus hub – bringing together all resources related to COVID-19 including information on tax, help for business and much more
ICAEW Financial Reporting Faculty is recognised internationally as a leading authority on financial reporting matters. The faculty is responsible for formulating ICAEW policy and makes submissions to standard setters and other external bodies on behalf of ICAEW. The faculty provides an extensive range of practical guidance to its members on common financial reporting problems. Further resources can be found at icaew.com/financialreporting.
ICAEW members, affiliates or members of staff in an eligible firm with member firm access may also discuss their specific situation with the Technical Advisory Service (TAS). The telephone helpline is currently unavailable but TAS can be contacted on live web chat.