Global outbreak of COVID-19 i.e. Coronavirus continues to impact the economies causing unprecedented crisis. The pandemic has impacted finances, apart from effects on results of operations, liquidity situation, future periods and capital resources. This is pushing the economies towards recession while decreasing consumer confidence, consumption levels, trade, productivity etc.
It is important for the companies to comprehend and reflect upon Covid-19’s accounting implications. In general, the companies are obliged to include in their December,2019 year end report specific disclosures of matter(s) that have significantly affected or could significantly affect operations i.e. information on the actual and potential impact of Covid-19 on their business, fiscal situation and prospects. These assume more importance if the entities are Chinese or are having significant business relationships with China.
Auditors are tasked with greater expectation to play an active role in driving up the quality of financial reporting. We at Crowe, UAE are working with regulators and stakeholders to promote a culture of improvement. As part of our commitment in helping bridge the expectations gap, we attempt to highlight briefly the crucial matter of accounting implications of Covid-19.
Key Impact Areas – Brief snapshot
1.Adjusting (or Non-Adjusting Event)
- IAS 10 ‘Events after the reporting period’ defines an adjusting event as an event that provides evidence of conditions that existed at the reporting date. A non-adjusting event indicates conditions that arose after the reporting date. It is being construed as a non-adjusting event as at December 31,2019 as there were a few Covid-19 cases and a little evidence of human spread
- Disclosure is essential should the impact of non-adjusting event be material and this includes nature of the event and an estimate of the financial effect, or if it is not possible to estimate this, a statement to that effect
- The impact of uncertainty and volatility on accounting is crucial. The events occurring after the reporting period, but before the financial statements for that period have been issued may require disclosures or possible recognition. Notably,for subsequent reporting periods, the measurement of assets and liabilities and recognition in the financials may be affected
2.Going Concern
- In line with IAS1, financial statements are prepared on a going concern basis, unless there is management intention to liquidate, cease operations or if there is no other option but to do so.
- The going concern assumption shall require evaluation and judgement as of issuance date of financials given the evolving pandemic and associated uncertainty. If there is material uncertainty that casts a significant doubt on the entity’s ability to continue as a going concern, then material uncertainty disclosure shall be required
3.Revenue recognition
- In line with IFRS15, an entity recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
- The pandemic could lead to reduced sales, contract modifications, revised pricing and associated significant uncertainty of collectibles for current and future income contracts. This shall require evaluation and judgement to arrive at impact of uncertainties warranting pertinent accounting treatment and disclosure
4.Liquidity Risk
- Liquidity risk is the risk that an entity will have difficulties in paying its financial liabilities.
- The liquidity risk management disclosures shall be as per IFRS 7 and consistent with the going concern assumption assessment. These shall also take into account various impacts viz. reduced sales and productivity on the working capital methodology and associated mitigants viz. supplier payment delays, early receivable settlements
5.Fair Value Measurement
- In line with IFRS 13, fair value measurement conveys the current value of asset or liability reflective of conditions as at the measurement date, but not the future date
- The entities should take into account the used unobservable input to reflect the market participants cognizance of the impact, if any, in their future cash flows expectations related to the asset or liability as at the reporting date. Pandemic impact on investments classified as current Investments needs to be seen. These shall require evaluation and judgement to arrive at impact of uncertainties warranting pertinent accounting treatment and disclosure viz. quoted prices are as per orderly market transactions, significant reduction in activity or volumes
6. Expected Credit Losses Measurement(ECL)
- In line with IFRS9, ECL measurement on financial assets is an unbiased probability weighted amount based out of possible outcomes after considering risk of credit loss, even if the probability is low. ECL can also be construed as the difference between cash flows due under the contract and cash flows that an entity expects to receive. The pandemic can impact ECL in diverse ways viz. payment terms, inabilities of borrowers to meet credit obligations
- The measurement of ECL should be based on an unbiased, probability weighted amount that is determined by evaluating a range of possible outcomes, reflecting time value of money and reasonable available information as at the reporting date in respect of past events, current conditions and future economic conditions forecast. Altered terms and conditions of the payments, if any, need to be reviewed to determine the ECL estimate impact. ECL applies to trade receivables, loans, debt securities, losses recognized in measuring loan commitments and financial guarantee contracts
7.Impairment Assessment
- In accordance with IAS 36, an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. This shall require evaluation and judgement to arrive at impact of uncertainties warranting pertinent accounting treatment and disclosure
- The entities need to evaluate the pandemic impact in terms of financial performance including future cash flows and earnings estimates. Financial projections and key assumptions could be the indicators that impairment has occurred. Examples include curtailment or closure, supply chain disruption, reduction in price or demand with associated revenues, changed market scenario etc. Impairment assessment of goodwill and indefinitely lived intangible assets could also have to be carried out
- Fixed Assets should be tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. There could be changes in the planned use of asset, necessitating rigorous evaluations of their recoverability. Significant investments in securities (equity and debt), equity method investments, should be assessed for impairment and associated volatility, declining capital markets may increase impairment probability of these investments
8.Leases
- In line with IFRS 16, a lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease
- The modification of the lease requires the re-measurement of the lease liability using a revised discount rate. There could be changes, concessions in the terms of lease arrangements for lease payments or free period viz. variable lease payments etc. These shall require evaluation to arrive at impact of uncertainties warranting pertinent accounting treatment and disclosure
9.Onerous contract provisions
10.Others
- Other areas include Inventory valuation, Taxes, Insurance recoveries, Provisions, Contingent assets and Contingent liabilities, Consolidated Financial Statements, Interim Financial Statements etc. In line with relevant IAS/IFRS, the aforesaid shall require evaluation to arrive at impact of Covid-19 related uncertainties warranting pertinent accounting treatment and disclosure
Alok Aggarwal
Director - Financial Services
[email protected]