As we approach the end of the financial reporting year, a common question from preparers and auditors might be “What new IFRS do I need to think about for this year’s financial statements?” But while there are indeed some new amendments to IFRS effective in 2020 (including new definitions of a business and what is material), it is likely that the biggest “change” to account for in this year’s financial statements will be driven by real-world events rather than a new accounting standard.
The COVID-19 pandemic has a potentially wide-ranging impact on businesses and the financial statements they prepare, from fundamental questions as to the basis of preparation to changes in models which might be used for accounting standards only recently adopted. There has also been new guidance and amendments issued by the IASB during the year as a response to the developing situation.
The first key underlying question to consider, which preparers and auditors may not have considered an issue previously, is “Are there any material doubts over a company’s ability to continue as a going concern?” For a calendar-year company, the answer to this question should reflect not only the company’s performance in 2020 and financial position at the end of December, but also at least the 12-month period until December 2021. If the going concern assumption is no longer appropriate, the financial statements will need to be prepared on a completely different basis. If the going concern assumption is still considered appropriate, but material doubts exist, then those uncertainties must be disclosed in the notes to the financial statements and referenced in the audit report.
Looking at other effects the pandemic might have on operations, the challenges caused by COVID-19 on customers and their cash flows could have a major impact on the collectability of receivables and loans. Companies should reflect the effects of COVID-19 within the assumptions used in their expected credit loss models and provision matrices when applying ‘IFRS 9 Financial instruments’. On the liability side, where they have had their own cash flow problems and renegotiated payment terms with lenders, companies will need to consider whether to account for changes to loans payable as a modification or extinguishment of a financial liability.
The effects of COVID-19 might also influence judgements made by companies who recently adopted ‘IFRS 15 Revenue from contacts with customers’. They will need to consider how best to reflect the effects of the pandemic when applying the variable consideration guidance in the standard. Companies might need to adjust estimates used to recognise revenue if there are changes in variable factors such as performance targets, delivery dates or discount thresholds arising from the pandemic.
A common form of relief seen during the pandemic has been lessors providing rent ‘holidays’ to lessees. This brought uncertainty as to whether these should be accounted for as lease modifications, variable lease payments or lease liability extinguishments. The IASB issued both an application note and amendments to ‘IFRS 16 Leases’ to help companies determine how to account for these rent holidays.
Impairment tests of property or plant is a common feature of the year-end accounting process which is likely to require more time this year. The impact of the pandemic on operating levels and cash flows generated is likely to create additional pressure on impairment indicators and will need to be reflected in the assumptions used in any impairment tests performed.
In addition to the accounting for the effects of the pandemic, good entity-specific disclosure will be an important requirement for this year’s financial statements, to explain both the numbers recognised and the assumptions made. The uncertainties over the full effects of the pandemic on businesses and the duration of the challenging conditions mean that it is likely that there will be an increase in the number of significant judgements and estimates which should be disclosed. The use of relevant and realistic sensitivities to illustrate the possible impact of these uncertainties will take on added importance.
Therefore, it is clear that there are many accounting and disclosure considerations arising from the pandemic, and most companies will be affected in some way.
How we can help
At Euromanagement we can provide support as you consider how to reflect COVID-19 in the 2020 financial statements, offering tailored training solutions on the areas likely to be impacted and a consultation service on the practical challenges of accounting for the effects.
The above content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.
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