Coronavirus: How to distinguish adjusting from non-adjusting post balance sheet events under UK GAAP
This ICAEW Know-How article was created by the Financial Reporting Faculty.
In this guide the faculty summarises the requirements under FRS 102 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.
While this guide is primarily aimed at those entities preparing accounts in accordance with FRS 102, consideration is also given to entities reporting under FRS 105. It does not cover disclosures required in the strategic report and directors report which will be covered in separate guidance from the faculty.
This guide draws on the advice outlined in the Financial Reporting Council’s (FRC) Company Guidance Update issued in March 2020.
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 (FRS 102.4.1).
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 ie, when the accounts are approved by the board of directors and signed on behalf of the board by a director of the company (FRS 102.32.2).
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 (FRS 102.32.2 & 4).
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 (FRS 102.32.2 & 10).
2019 year ends
For 2019 year ends there is general consensus that Coronavirus is a non-adjusting event for the vast majority of UK entities (see our guide The financial reporting implications of Coronavirus under UK GAAP). 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 UK 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, a UK entity 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, a UK entity with the same year end but which is significantly reliant on Chinese manufactured goods within its supply chain, might 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. As described in the FRC’s guidance – 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 (FRS 102.8.6).
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;
- cease trading;
or that it has no realistic alternative but to do so.
FRS 102 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, FRS 102 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 (FRS 102.3.9). FRS 102 does not 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 (FRS 102.3.9).
Further guidance on the disclosures required in relation to going concern assessments can be found in the FRC’s Company Guidance Update.
In addition, the faculty has produced Coronavirus: Going concern considerations – a guide for preparers.
Small entities and Section 1A of FRS 102
With the exception of the disclosures relating to going concern (see below) the recognition, measurement and disclosure requirements set out in this guide also apply to entities applying FRS 102 Section 1A Small Entities.
If a small entity’s accounts have not been prepared on a going concern basis, that fact must be disclosed, together with the reasons for it and its effects. This disclosure must be given in the notes to the accounts. [FRS 102.1A.7 footnote 11 FRS 102.1AC.10].
Although entities applying Section 1A are not required to provide the disclosures relating to material uncertainties related to events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern, they are nevertheless encouraged, when relevant, to provide this information (FRS102.1AE.1).
Furthermore, while there are legal restrictions on the information that can be mandated in small entity accounts, those accounts must still give a true and fair view. Therefore, judgement must be applied when considering whether further disclosures, over and above those specifically required by Section 1A of FRS 102, will be needed in order for the accounts to give a true and fair view.
Micro-entities and FRS 105
The principles for the recognition and measurement requirements relating to post balance sheet events, as outlined in this guide, are the same for an entity applying FRS 105. However, an entity applying FRS 105 is not required to make any of the disclosures outlined in this guide. Indeed, very limited disclosures are required in micro-entity accounts, and provided these and other basic legal requirements are complied with, the accounts are presumed by law to give a true and fair view.
That is not to say that a micro-entity cannot choose to disclose additional information, including for example, in relation to post balance sheet events. However, if it does choose to include additional information, over and above that required by FRS 105, it must refer to the relevant requirements of Section 1A Small Entities of FRS 102 regarding that information.
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.
We have developed a separate guide for those preparing accounts in accordance with IFRS.
The hub includes:
- Coronavirus: The financial reporting implications of Coronavirus under UK GAAP – this guide is aimed primarily at entities with 2019 year ends
- Coronavirus: Checklist: implications of COVID-19 on the preparation of accounts under FRS 102 – this guide is aimed primarily at entities with 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.
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