Interim financial statements in light of COVID-19 Interim financial statements in light of COVID-19

The drops in economic indicators^[1] that we have recently experienced only confirm what we all already knew: the COVID-19 pandemic is massively impacting our economies. Even though many countries are slowly returning to some kind of normality, it is clear that the economic distortion and financial impacts of the pandemic will accompany us for a long time to come. Companies will have to reflect this in their 2020 interim financial statements.

Far from it. Preparing interim financial statements in the current environment is not just a roll-forward of the last annual financial statements. Instead, the focus will lie on:

• Reflecting the economic and financial impacts of the pandemic in budgets and forecasts,
• Recognizing its impacts on the numbers in the interim financial statements, and
• Providing transparent and meaningful disclosures.
  

Let’s have a closer look at each key focus area.

Three words describe it best: update, update, update.

The current situation is very dynamic, volatile and unpredictable. Who would have thought for example that oil prices could ever become negative? Estimating how fast the situation will recover and market participants begin to adapt to new realities requires significant judgement. What is clear, though, is that the budgets and forecasts prepared as of 31 December 2019 are no longer appropriate. But how should a company deal with the current uncertainty when updating budgets and forecasts?

Even economists are struggling to predict future developments. Therefore, companies should prepare multiple, plausible scenarios (including a downside scenario) and factor in external information to make budgets and forecasts more robust. This process should be highly dynamic to make sure that the scenarios reflect the latest updates on the situation as at the reporting date.

Budgets and forecasts are used for multiple purposes when preparing interim financial statements. For example, when assessing:

• the going concern assumption,
• the need to recognize an impairment, and
• the recoverability of deferred tax assets.

The respective assessments need to be revisited based on the new budgets and forecasts and generally need to be made consistently when preparing interim financial statements.

Accounting implications of the COVID-19 outbreak itself, state and private countermeasures, and knock-on effects can be pervasive and vary, depending on the company’s individual situation. Typically, impacts may include:

• Impairments on goodwill, other intangible assets and property, plant & equipment,
• Write-offs of inventory,
• Increased expected credit losses on receivables,
• Write-offs of deferred tax assets,
• Financial liabilities becoming current due to breaches of covenants,
• Recognition of government grants,
• Revaluation of net defined benefit obligations, and
• Adjustments to revenue.

Obtaining the full picture can be complex and will require an impact analysis. Our talkbook supports you in identifying potential impingements and the accompanying frequently asked questions guide you in developing appropriate accounting treatments. You will find the link to those resources at the end of this blog.

It depends. Companies may think about disclosing measures such as adjusted EBIT to communicate impacts from COVID-19 to investors. However, the use of APMs is subject to a number of restrictions, including:

• APMs need to be defined clearly and comprehensibly, and the definitions must be disclosed,
• APMs may not be misleading, 
• A reconciliation to the amounts in the interim financial statements must be provided, and
• Consistent application of APMs is required for future periods.

If the impacts of COVID-19 are difficult to identify or if they have a pervasive effect on the financial performance, position, and/or cash flows of the company, the use of generic COVID-19 APMs could be misleading. Therefore, any APMs should be based on specific, objectively measurable and limited impacts only.

Yes. It is still necessary to differentiate between COVID-19-related events that existed at the end of the interim reporting period and those that arose only after that date. The latter do not influence recognition and measurement of assets and liabilities, but need to be disclosed.

Companies should implement a process to identify and document relevant events and their timing, because it may be very difficult to determine the timing of events in retrospect.

Definitely. Providing transparent and meaningful disclosures is key in the current situation. Investors and other users may expect information above and beyond what is typically disclosed. They will be interested in understanding the company’s exposure to and impacts of COVID-19. In addition, they may want to understand management’s judgements and estimates.

Disclosures in the notes to the interim financial statements should generally include the following:

• An overview of the company’s exposure to COVID-19 (incl. subsequent events),
• Significant judgements and assumptions made by management related to COVID-19, and
• Detailed information on significant impacts (such as impairments).

Companies need to apply judgement in determining the extent of disclosures required. Disclosure requirements for annual financial statements could be a good starting point.

Overall, preparing financial statements for 2020 will require a lot more effort and management involvement than usual.

We have prepared a talkbook for accounting under IFRS, Swiss GAAP and Swiss CO that helps to identify areas that need special attention, and the accompanying frequently asked questions provide you with insights into the issues. These resources will be updated regularly to keep you abreast latest developments.

_{[1] Such as the OECD’s Composite leading indicator (CLI)}