COVID-19 & Financial Reporting
Entities need to consider the financial impact on the entity and the areas of the financial statements that will be affected to determine the disclosures required. The following areas needs to be taken into consideration during COVID-19 & Financial Reporting:
1. REVENUE RECOGNITION
- The corona virus outbreak could affect revenue estimates in ongoing customer contracts in the scope of IFRS 15 Revenue from Contracts with Customers.
- Uncertainties related to the corona virus outbreak could also prompt entities to modify contracts with customers or reassess whether it is probable that the entity will collect the consideration to which it is entitled.
- Significant judgement may be needed to determine the effect of uncertainties related to the corona virus on both ongoing and future revenue contracts.
2. IMPAIRMENT ASSESSMENT
- An impairment test must be performed in response to indicators of impairment in addition to a mandatory impairment test for goodwill and intangible assets with indefinite useful lives at least annually.
- Company should provide detailed disclosure of the assumptions taken, the evidence on which they are based and the impact of a change in key assumptions.
- Real estate companies with inventories of under construction properties could be impacted by a fall in property prices.
- Seasonal inventories and perishable products might be exposed to the risk of loss due to damage, contamination, physical deterioration, obsolescence, changes in price levels or other causes.
- Companies would need to assess whether, on their reporting date, an adjustment is required to the carrying value of their inventory to bring them to their net realizable value in accordance with the principles of IAS 2 ‘Inventories’.
- If an entity’s production level is abnormally low due to a temporary shutdown of production, it may need to review its inventory costing to ensure that unallocated fixed overheads are recognized in profit or loss in the period in which they are incurred.
4. NEW EMPLOYEE BENEFITS AND TERMINATION BENEFITS
- The entity must first determine whether the benefits provided are a result of past service or if they will be provided as services are rendered because that will impact when the liability is recognized.
- The specific guidance in IAS 19 ‘Employee Benefits’ must be considered when making this determination.
- If the entity offers or is required to pay termination benefits to the affected employee(s), management must consider how and when to account for the liability/expense in accordance with IFRS.
5. FAIR VALUE MEASUREMENT
- The fair value measurement (FVM) impact would depend on the evaluation of whether the severity of the outbreak at the reporting date would have impacted participants’ valuation assumptions at that time.
- Companies will also need to consider making related disclosures that could reasonably be expected to influence decisions that the users of general-purpose financial statements would make on the basis of those financial statements.
- Disclosure may be needed to enable users to understand whether or not the outbreak has been considered for the purpose of FVM.
6. FINANCIAL INSTRUMENTS
- Due to the rapidly changing economic environment, an entity may find that it is subject to new or increasing risk (e.g. credit, liquidity, or market risk) or concentrations of risk. In addition, an entity may find that its risks have changed from the prior period.
- Hence the disclosures required under IFRS 7 in this area should reflect changes in the liquidity position as a result of the coronavirus outbreak.
- For entities that will prepare interim financial statements under IAS 34 Interim Financial Reporting, if concentration and liquidity risks have significantly changed compared to their most recent annual financial report, they should disclose the above information in their interim financial statements.
7. HEDGE ACCOUNTING
- Hedge effectiveness assessment is required to be performed at the inception and on an on-going basis at each reporting date or in case of a significant change in circumstances, whichever occurs first.
- The current volatility in markets may result in an entity requiring to either re balance the hedge, where applicable, or discontinuing hedge accounting if an economic relationship no longer exists or the relationship is dominated by credit risk.
8. DEBT REPAYMENT AND CLASSIFICATION
- Some financial institutions (and other creditors) are providing debt holders with the option to defer principal payments for a period of time.
- Management will need to assess whether the change in terms represent a modification or extinguishment of the debt obligation and revisit the portion of the debt that is considered current versus non-current.
- If a creditor forgives an amount owing by an entity, management needs to carefully consider the point in time when the liability is discharged and can be de- recognized along with the appropriate accounting treatment.
- An entity that has guaranteed an amount owing by another entity/individual should consider how the other entity/individual is impacted by the current global situation.
- Depending on the circumstances, the entity may need recognize an additional liability related to the guarantee which would be the higher of the ECL and the amount initially recognized less amortization.
10. GOING CONCERN
- When preparing financial statements, management has to make an assessment of a company’s ability to continue as a going concern, and whether the going concern assumption is appropriate.
- Given the unpredictability of the potential impact, there may be material uncertainties that cast doubt on the company’s ability to operate under the going concern basis. If the company, nevertheless, prepares the financial statements under this assumption, it must disclose these uncertainties.
11. CONTRACT MODIFICATIONS
- Companies affected by the COVID-19 outbreak may experience cash flow challenges as a result of disrupted operations, higher operating costs or lost revenues.
- In such cases, they will need to consider whether any changes to existing contractual arrangements represent a substantial modification or potentially a contract extinguishment.
12. GOVERNMENT ASSISTANCE
- Part of the response by governments to the coronavirus outbreak has been to introduce support measures for individual industries along with wider economic stimulus packages.
- Companies need to monitor the current and potential effects that the novel coronavirus (COVID-19) will have on their financial reporting.
13. CONTINGENT LIABILITIES
- Entities may anticipate losses on account of reduction in demand, supply chain disruptions or losses due to an overall decline in economic output.
- However, future operating losses on existing contracts do not meet the definition of a liability unless they fall in the category of onerous contracts, and hence, should not be provided for in accordance with IAS 37.
14. EVENTS AFTER THE REPORTING PERIOD
- Events after the reporting period are those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue.
- Entities need to ensure effective processes are in place to identify and disclose material events after the reporting period which could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements.