Coronavirus: How to distinguish adjusting from non-adjusting events after the reporting period under IAS 10
In this guide the Financial Reporting Faculty summarises the requirements under IAS 10 relating to events after the end of the reporting period (hereafter referred to as ‘post balance sheet events’) and considers how entities might distinguish between adjusting and non-adjusting post balance sheet events in light of the coronavirus pandemic.
This ICAEW Know-How article was created by the Financial Reporting Faculty.
This guide is primarily aimed at those entities preparing IFRS accounts. It also considers the requirements of the IFRS for SMEs standard. It does not cover disclosures in other reports that might accompany the accounts.
We have developed a separate guide for those preparing accounts in accordance with FRS 102.
Post balance sheet events – a recap
A fundamental principle in the preparation of accounts is that they should reflect the conditions that existed at the balance sheet date (IAS 1.10).
When preparing accounts, consideration must also be given to events which occur between the balance sheet date and the date when the accounts are authorised for issue (IAS 10.3 and 7). While the process involved in authorising the financial statements for issue may vary depending on the jurisdiction, it is likely to be when the accounts are approved by the board of directors and signed on behalf of the board by a director of the company.
Information which comes to light after the balance sheet date that provides evidence of conditions that existed at the balance sheet date (adjusting post-balance sheet events) should be reflected in amounts recognised in the accounts (IAS 10.3 and 8).
Information indicative of conditions that arose after the balance sheet date (non-adjusting post balance sheet events) should be disclosed when material. This disclosure should include information on the nature of the event, and an estimate of its financial effect or a statement that such an estimate cannot be made (IAS 10.3 and 21).
For 2019 year ends the emergence of coronavirus is generally considered to be a non-adjusting event for the vast majority of entities (see our guide The financial reporting implications of Coronavirus under IFRS). Therefore, entities will typically not adjust the amounts that appear in the accounts unless events after the balance sheet date mean that it is not appropriate to prepare the accounts on a going concern basis (see below). As noted above, disclosures are required in the accounts for any non-adjusting post balance sheet events, when material.
2020 year ends
On 30 January, the World Health Organisation (WHO) announced Coronavirus as a global health emergency. On 11 March 2020, it announced that Coronavirus was a global pandemic.
For many entities with 31 March 2020 year ends, the outbreak is likely to be considered a current-period event that will also require ongoing evaluation for events after the balance sheet date. 31 January 2020 and 29 February 2020 year ends are likely to be more challenging and significant judgement will be required to determine whether events related to COVID-19 are adjusting or non-adjusting post balance sheet events.
Adjusting or non-adjusting
Significant judgement will be needed to determine the conditions that existed at the balance sheet date and whether, therefore, the amounts recognised in the accounts need to be adjusted. This judgement will be heavily dependent on the reporting year end in question, the entity’s own individual circumstances, and the particular events under consideration.
For example, an entity based in the UK with a January 2020 year end that has few international dependencies, might consider that events related to COVID-19 do not reflect conditions as at the balance sheet date and that no adjustments are required to the amounts recognised in the accounts. On the other hand, an entity based in China with the same year end could reach a different conclusion.
Factors to consider
When making judgements about conditions that existed at the balance sheet date, entities will need to use all available information about the nature and timing of the COVID-19 outbreak and the measures taken in response. For example, consideration might be given to the timing and impact on staff, customers and suppliers, of:
- travel restrictions;
- quarantines and lockdowns;
- closure of businesses/schools; and
- government initiatives to support individuals and businesses.
Entities will need to identify the events related to COVID-19 that they consider important and assess whether each reflects conditions at the balance sheet date, for example, does the event shine a brighter light on conditions (at the balance sheet date) or did conditions change after the reporting date?
It may be helpful to refer to the WHO updates as these provide helpful information on the identification and spread of COVID-19 across the globe.
When significant judgement has been applied in determining whether a post balance sheet event is adjusting or non-adjusting, this must be disclosed (IAS 1.122).
Implications for forecasting
Forecasting future income and cash flows is important when valuing certain items in the accounts, for example when estimating recoverable amounts. With the exception of going concern assessments, the estimated future cash flows must be based on conditions that existed at the balance sheet date. Therefore the estimation of a recoverable amount might be very different for the same asset if the calculation was performed for a 31 December 2019 year end and, say, a 31 March 2020 year end. In these situations, judging whether an event is adjusting or non-adjusting will be particularly significant.
A review of post balance sheet events is also important when assessing the basis on which the accounts are prepared. Entities are not permitted to prepare accounts on a going concern basis if management has determined after the balance sheet date that it either intends to:
- liquidate the entity; or
- cease trading,.
or that it has no realistic alternative but to do so.
IAS 10 states that a deterioration in operating results and financial position after the balance sheet date may indicate a need to consider whether the going concern assumption is still appropriate. If management determines that the going concern assumption is no longer appropriate, IAS 10 considers the effect to be so pervasive that a fundamental change in the basis of accounting is required ie, the accounts must not be prepared on the going concern basis.
When the accounts have not been prepared on the going concern basis, entities are required to disclose that fact, together with the basis on which the accounts have been prepared, and the reason why the entity is not regarded as a going concern (IAS 1.25). Neither IAS 10 or IAS 1 specify the basis on which the accounts should be prepared, when not prepared on the going concern basis.
If management concludes that the entity is a going concern, but is aware, in making its assessment, of material uncertainties related to events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern, details of those uncertainties must be disclosed in the accounts (IAS 1.25).
Further guidance on going concern considerations can be found in the faculty’s guide Coronavirus: Going concern considerations – a guide for preparers. The guide is aimed primarily at entities preparing accounts in accordance with FRS 102 but it includes considerations that can be broadly applied to all entities.
Applying the IFRS for SMEs standard
The requirements of Section 32 Events after the End of the Reporting Period mirror those in IAS 10. When significant judgement has been applied in determining whether a post balance sheet event is adjusting or non-adjusting, this also must be disclosed (Section 8.6).
It will be important for entities to incorporate a comprehensive post balance sheet review in the year-end reporting plan, particularly as information about the scale and the impact of the virus changes frequently. The WHO provides regular updates on the virus.
The hub includes:
- Coronavirus: The financial reporting implications under IFRS– this guide is aimed primarily at entities with 31 December 2019 and early 2020 year ends
- Coronavirus (Covid-19): Extensions to filing deadlines and changing reporting dates
- Bitesize Briefing: COVID 19 and post balance sheet events
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 webchat.