COVID-19 Financial reporting: Disclosures COVID-19 Financial reporting: Disclosures COVID-19 Financial reporting: Disclosures

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FINANCIAL RESILIENCE

For many organisations, COVID-19 has significantly impacted their performance, financial position and cash flows, and management and directors are looking at ways to communicate the effects of the pandemic on their financial results in the Operating Financial Review, the Directors’ Report and in the financial statements.

Consideration needs to be given as to how organisations disclose these impacts to ensure that they are in compliance with both the Australian Accounting Standards and ASIC Regulatory Guide RG 230 Disclosing non-IFRS financial information and ASIC FAQs on COVID-19 implications for financial reporting and audit.

• Determine accounting policies to identify the impacts of COVID-19.
• Consider wording in pro-forma financial report and other external communications.
• Engage with auditors on the proposed accounting policies and disclosures.

• What are examples of acceptable disclosures that segregate the impact of COVID-19 in documents other than the financial statements?
  
• What are examples of disclosures of the impact of COVID-19 in documents other than the financial statements that would likely be misleading and not be acceptable?
• Can I present the impacts of COVID-19 separately on the face of the income statement?
• What presentations of the impacts of COVID-19 on the face of the income statement would not be acceptable?
• What does an organisation need to consider when establishing an accounting policy for identifying the impacts of COVID-19?
• When can an organisation describe COVID-19 impact as unusual or exceptional in the financial statements?
  

The following are examples of how information showing the impacts of COVID-19 on the financial performance of an entity may be presented in documents other than the financial statements such as media releases and the operating and financial review:

• Financial performance split into time periods e.g. 9 months pre-COVID-19, 3 months during COVID-19 restrictions or monthly P&L. This is based on the assumption that good quality data is available to enable the segregation of information. The challenge would be around allocating revenue and expenses between the different periods and whether the process of allocation is reliable. Furthermore, caution should be exercised as the Australian regulator, the Australian Securities and Investments Commission (ASIC) has stated that presenting a split of results between pre-COVID-19 and post COVID-19 periods is problematic and can be potentially misleading.
• Adjusting Alternate profit measures for, or separately identifying directly attributable and incremental income and expenses related to COVID-19 e.g. JobKeeper grant income, onerous contract costs, restructuring costs. The challenge would be determining whether the income or expense is directly attributable and incremental to COVID-19.
• Disaggregating specific income or expense categories, such as employee benefits and disclosing directly attributable and incremental costs and income arising due to COVID-19 e.g. termination costs or JobKeeper subsidy received and netted off against salaries and wages. If this approach is adopted then total employee benefits expenses would be disaggregated between COVID-19 directly attributable and incremental, termination costs and all other business as usual employee costs.
  

Information presented as follows is likely to be misleading and is not an acceptable method for presenting the impact of COVID-19 in documents outside the financial statements: 

• Presenting a hypothetical measure of financial performance, for example if not for COVID-19, revenue would be $X higher. 
• Splitting specific categories or items of income and expenses between those arising from “normal” operations and “COVID-19” on an arbitrary basis. For example identifying $X of impairment expenses, or employee expenses that is over and above “normal” and therefore considered COVID-19 related. 
• Identifying only negative impacts related to COVID-19 and not related positive impacts e.g. reduction in sales from closed physical stores but not reflecting increases in online sales.

Separate presentation through additional line items of income or expense, headings or sub-totals in the income statement of material items is appropriate only when it is necessary to an understanding of the organisation’s performance. In our experience, disclosures in the notes to the financial statements will generally be sufficient for many items that are material individually.

Where the effects of COVID-19 are pervasive, affecting a number of line items in the income statement, it may not be meaningful to present the impacts on the face of the income statement. Instead it may be more appropriate to disclose in the notes to the financial statements the total impact of the pandemic with a description of the circumstances and the income statement line items affected.

Where it is determined that separate presentation of COVID-19 impacts on the income statement is appropriate, an organisation’s current income statement presentation format, including the classification of expenses by either function or nature, will affect the way any COVID-19 impacts are presented on the face of the income statement.

Whether the impacts of COVID-19 are presented on the face of the income statement or in the notes to the financial statement, the organisation needs to develop and disclose an objective basis for identifying COVID-19 impacts in their accounting policy.

Any quantitative disclosures in the income statement or in the notes to the financial statements should also be accompanied by narrative disclosures of the impact, explaining the nature of the expenses, circumstances and how they are COVID-19 related.

The following presentation on the face of the income statement should be avoided:

• Operating profit sub-total excluding COVID-19 impacts. If an organisation presents an operating profit sub-total, it should not present COVID-19 related income and expenses outside of operating results solely because they may be non-recurring. Instead, organisations should apply the definition of ‘operating’ consistently to income and expenses regardless of whether they are COVID-19 related.
• Non-IFRS/alternative profit measures adjusting for impacts of COVID-19. Disclosure of such measures is only acceptable in the operating segment or EPS notes to the financial statements.
• Disaggregated presentation by columns approach, e.g COVID-19 impacted column, Other column and Total column or pre-COVID-19 column, post-COVID-19 column and Total column.

Whether the impacts of COVID-19 are presented on the face of the income statement or in the notes to the financial statements, an organisation needs to develop and disclose an objective basis for consistently identifying any impacts separately disclosed.

The basis of identifying impacts as COVID-19 related and why they warrant separate disclosure should be included as a significant accounting policy.

Identifying income and expenses that relate to COVID-19 may be challenging as distinguishing between income and expenses that are part of normal operations versus those that are COVID-19 related may involve significant subjectivity. Income and expenses that relate to COVID-19 should be identified on a non-arbitrary basis.

In developing this accounting policy for identifying COVID-19 impacts, consideration should be given to:

• whether items of income and expenses attributed to COVID-19 are directly attributable and incremental. Incremental income and expenses directly attributable to COVID-19 are income and expenses that would not have been earned or incurred if COVID-19 had not occurred and are not expected to recur after COVID-19 e.g. JobKeeper grant income;
  Recurring income and expenses that would be earned or incurred regardless of COVID-19 are not incremental and therefore not considered as COVID-19 related e.g. payroll for idle employees, depreciation of plant facilities when production is suspended, rent and utility costs incurred during temporary closures are not considered COVID-19 related and therefore should not be described as such;
• the completeness of identified impacts as both positive and negative impacts should be identified and separately disclosed (unbiased);
• if COVID-19 impacts more than one reporting period, COVID-19 related income and expenses should be identified consistently period to period. Also, referring to these types of impacts as non-recurring could be considered misleading;
• splitting of profit or loss between pre-COVID-19 and post-COVID-19 periods in the financial statements (including in the notes) is not considered appropriate by ASIC as it can potentially provide misleading information;
• hypothetical measures of financial performance or adjustments is not acceptable, e.g. adding a “COVID-19 shortfall” to disclose a predicted revenue without the impact of COVID-19.

Careful consideration should also be given to how separately identified COVID-19 impacts are described. If the description of ‘unusual’ or ‘exceptional’ is used, it should be reserved for items that justify a prominence greater than that achieved by separate presentation or disclosure.

Organisations should also consider whether amounts are truly unusual, for example increased cleaning costs. Compared to the previous year such costs may be unusual in amount, but on a go-forward basis it could become the new norm. Providing a narrative disclosure in such circumstances may provide users with more relevant information.