Our last Covid-19 blog post kicked off our examination of the coronavirus outbreak’s financial reporting impacts. These impacts depend on varying facts and circumstances, including how exposed and vulnerable an entity’s operations and financial statement figures are to the outbreak’s effects, e.g. volatile economic conditions.
Are Covid-19 events categorized as adjusting or non-adjusting?
With respect to financial statements for the year ending on 31 December 2019, the financial reporting impact of the outbreak is generally considered as a non-adjusting event (with the exception of going concern): any significant changes in business activities and economic conditions resulted from events occurring after the reporting date of 31 December 2019, such as actions taken by the government and private sector in response to the outbreak.
Although certain events did occur prior to 31 December 2019 – for example, cases had been reported by then – the World Health Organization did not announce Covid-19 as a global health emergency until 31 January 2020, i.e. after the end of the reporting period. Many national governments took safety measures only after this announcement, and most governmental and private sector response actions occurred after 31 December 2019. So, based on the information and associated risks known by that date, it is likely that market participants would have made no adjustments to their assumptions or only inconsequential changes.
Assumptions used in impairment calculations for financial and non-financial assets at the reporting date must reflect the reasonable and supportable information available on 31 December. Considering the specific facts and circumstances, professional judgement will be necessary. Caution should be taken to avoid inappropriately applying hindsight or developing valuation inputs that are not consistent with the conditions or reasonable expectations of 31 December 2019. For example, the recoverable amount calculations of non-financial assets under IAS 36 should not reflect any outcomes that would not have been reasonably expected at 31 December 2019.
If the impacts are considered to be material, non-adjusting events with no effect on amounts recognized as of 31 December 2019, entities need to provide appropriate disclosures that reflect the nature of these events or changes in conditions after the reporting date, including an estimate of the financial effect if possible.
Examples of the events or conditions that may be considered material non-adjusting events and warrant disclosure in financial statements could include:
- significant business interruption arising from supply chain disruption, closure of manufacturing or commercial facilities, travel restrictions and logistical disruption, lack of available personnel, etc.;
- significant declines in sales, earnings and/or operating cash flows;
- losses in contracted business or losses/exposures arising from counterparties asserting force majeure;
- debt restructuring or entering into significant commitments including new loan facilities;
- breach of a significant loan covenant or a debt default after the reporting date;
- abnormally large changes in equity or debt security prices, foreign exchange rates or interest rates after the reporting date that will significantly impact the measurement of assets and liabilities in future periods;
- restructuring and redundancy plans.
In contrast, for subsequent reporting periods ending after 31 December 2019 (e.g. 2020 interim reporting for calendar year-end entities or entities with an annual reporting date after 31 December 2019), the accounting impacts of material events and conditions that arise from the outbreak and occur during these reporting periods will need to be recognized.
From a financial reporting perspective, the outbreak’s impact will cover, but not be limited to, the following judgments and estimates made by management:
- fair value measurement, particularly for unquoted instruments,
- expected credit losses,
- inventory valuation,
- impairment of non-financial assets,
- recoverability of deferred tax assets,
- classification of financial liabilities as current versus non-current,
- existence of contingent liabilities.
If there is any doubt on whether the going concern basis is still appropriate for your company, you may find this post helpful.
You can read part one of this series here.