Does Coronavirus have an impact on financial statements for the year ended December 31, 2019?

Helena Šulcová

Both personal and working life of all of us starts to be affected by the difficult economic situation that has emerged in the global economy related to Coronavirus. In the moment, when I am writing this article, ie. on March 14, 2020, many companies implemented home office or decreased a volume of its production. Shops, with some exceptions, are closed as well as restaurants. Only time will show a real economic impact.

Maybe trivial in this situation may seem the question whether the Coronavirus has an impact on financial statements for the year December 31, 2019.

However, regulatory bodies already reacted on the situation. As example I can mention SEC (U.S. Securities and Exchange Commission) which advised on March 4, 2020 to all public companies to assess what the Coronavirus means for their future operations and financial results and to make appropriate disclosures to their shareholders and other members of the investment community. In addition, the SEC allowed these companies to delay SEC filings, if necessary, to collect accurate and complete information for disclosures of the impact of the Coronavirus on its operations and financial conditions.

So, what is the impact on financial statements and what considerations companies should make?

IAS 10 (Events after Balance Sheet Date) defines an adjusting event as an event that provides evidence of conditions that occurred after the balance sheet date, but in fact completes events which existed already at the balance sheet date. As a non-adjusting event defines events which newly arose after the balance sheet date.

It is widely accepted that on December 31, 2019 a limited number of cases of an unknown virus had been reported to the World Health Organization. There was no explicit evidence of human-to-human transmission at that date. The subsequent spread of the virus and its identification as a new Coronavirus does not provide additional evidence about the situation at December 31, 2019 and is therefore a non-adjusting event.

However, depending on the date when companies prepared and published its financial statements for the year ended December 31, 2019, it is an event known at the date of publishing the financial statements, that is why it is a non-adjusting event. Companies thus should disclose in the financial statements information on the assessment, made by the Management Board of the company, of any impact of Coronavirus on the financial situation of the company and its going concern.

The considerations should include issues such as:

  • the impact of economic events on the estimation of impairment of financial assets and non-financial assets,
  • interruption of supply chains or other trade disturbances and their impact on the company's situation,
  • forecasts of future cash flows and the impact on the company's liquidity and financial condition,
  • terminating loan / credit agreements or changing the terms of loans / credits,
  • ·violation of covenants in loans or credits,
  • events that may give rise the indebtedness (debt) or affect the maturity of debt instruments that must be bought out (or will be repayable at the request of the contractor);
  • dealing with suspension of termination or termination of commercial contracts and assessment whether contracts for the sale or purchase of goods or services are contracts that create a burden in the event of their termination or suspension of performance.

In a case of potential material impact, appropriate disclosures should be added to footnotes to financial statements, chapter Post Balance Sheet Events.

Companies with a balance sheet date after December 31, 2019, should consider potential impacts of Coronavirus more carefully and assess the conditions which existed at the relevant balance sheet date.