As we all know, the world has turned upside down in 2020. Who would have imagined, at the outset of the year, the adverse consequences on the businesses of the coronavirus pandemic and global lockdown?
We have seen the impact of lockdown on many industries including travel, hospitality, transportation, manufacturing, real estate, retail, energy and banking. In order to fight the economic impact of this unprecedented situation, many countries have announced stimulus packages that have exceeded those offered in the global financial crisis of 2008.
The unprecedented crisis that we are in has implications on preparation and analysis of IFRS financial statements.
The financial statements of 2020 and beyond will be very different to that of 2019.
There are three key things that the preparers and users of IFRS financial statements should focus on:
- Going Concern Assessment
Going concern is a real concern for many businesses. Even if the business has a sound cash position, there is additional work required to demonstrate that it will continue to operate in the next 12-18 months even if the economic conditions further deteriorated. For this, an entity is required to consider different scenarios, including a severe plausible downside.
There may be difficult conversations with the auditors as they challenge management judgements and estimates and look for sufficient evidence before reaching their conclusion on the going concern assessment. Going concern may be a matter of emphasis in the auditor’s report if there are significant uncertainties involved in the conclusion reached by the management. Entities are expected to make detailed disclosures about their estimates and reasons for the conclusion they have reached.
If an entity is not a going concern, the financial statements must be prepared on a break-up basis, rather than based on continuing operations.
The below is an extract of the disclosure by Rolls Royce about their assessment of “Severe but plausible downside scenario” in their June 2020 interim report.
- Measurement of assets and liabilities
As mentioned above, if an entity is not a going concern there is an impact on the measurement of assets and liabilities. The coronavirus pandemic affects the measurement of assets and liabilities even if we conclude that the entity is a going concern. Some of the examples are:
- customer receivables, including expected credit losses (click here for IASB guidance)
- inventory obsolescence
- impairment of assets including goodwill
- rent concessions (IFRS 16 updated to incorporate rent concessions)
- abnormal costs, including paid staff leave
- impact of the government support
- debt restructuring
- impact on dividends
- management disclosures on the commercial impact, future risks and uncertainties
The interim financial statements of Carnival Plc (which owns cruise liners) for the six months to 31 May 2020 disclose the impairment recognised as a direct result of the impact of the coronavirus pandemic.
One of the issues that management faces is the uncertainty around when we will return back to normality. As a result, the assumptions and estimates from the previous quarter may need to be significantly revised in the current quarter. The budgets and forecasts used to assess impairment need to be updated frequently in the light of most recent information.
We have seen above that there are significant judgements and estimates that may need to be revised frequently by the management. This makes comparability of financial statements difficult. It is critical for management to make relevant, detailed and clear disclosures in the financial statements about their assessment of the impact of the coronavirus pandemic. This helps the users apply their judgement when doing their analysis to make informed decisions.
In the UK, the Financial Reporting Council has published “COVID-19 Thematic Review” which indicates the key areas they focused on when reviewing the financial statements and their findings, including suggestions on the disclosures.
If you are interested to learn more about the impact of COVID-19 on the IFRS financial statements, connect with us on email@example.com for further information or registration for our upcoming courses.
30 November: IFRS 9 Financial Instruments
04 December: Impact of COVID-19 on the IFRS Financial Statements
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