If the widespread impact of COVID-19 began during the entity’s reporting period, the impact will be reflected in its financial statements for that period. However, to the extent that the widespread impact of COVID-19 occurred during the entity’s ‘subsequent events period’ (ie the period between the end of the reporting period and the date when the financial statements are authorised for issue), management must determine how material developments after the year-end should be reflected in the entity’s financial statements for the period under audit or review.
In accordance with IAS 10 ‘Events after the Reporting Period’, entities are required to distinguish between subsequent events that are adjusting (ie those that provide further evidence of conditions that existed at the reporting date) and non-adjusting (ie those that are indicative of conditions that arose after the reporting date). Entities are required to update the carrying amounts of any assets or liabilities recognised in their financial statements to reflect any adjusting events that occur during the subsequent events period.
When does COVID-19 not become an adjusting event?
In our view, the impact of COVID-19 would be a non-adjusting subsequent event for reporting periods ended on or before 31 December 2019. Consequently, there would be no impact on the recognition and measurement of assets and liabilities in an entity’s financial statements. Although cases of the virus in Wuhan City, China were reported to the World Health Organisation (WHO) on 31 December 2019, there was little confirmed evidence of human-to-human transmission at that time and the WHO did not declare the outbreak to be a public health emergency of international concern until 31 January 2020.
As such, it is presumed that the significant development and spread of COVID-19 did not take place until January 2020. Financial statements for an entity with a reporting period ending on or before 31 December 2019 should only reflect the conditions that existed at 31 December 2019 and must therefore exclude the significant effects of the COVID-19 pandemic.
However, all reporting entities should determine whether or not they should make additional disclosures to describe the impacts of the outbreak in the subsequent events period. Generally, disclosure should be made of those events during the subsequent events period that do not relate to conditions that existed at the date of the financial statements but cause significant changes to assets or liabilities in the subsequent period and either will, or may, have a significant effect on the future operations of the entity. For material non-adjusting events, IAS 10 stipulates an entity must disclose (a) a description of the nature of the event; and (b) an estimate of the financial effect, or a statement that such an estimate cannot be made.
Examples of non-adjusting events that would generally result in disclosure include:
- management’s plans to deal with the effects of the COVID-19 outbreak and whether there is material uncertainty over the entity’s ability to continue as a going concern
- breaches of covenants, waivers or modifications of contractual terms in lending arrangements
- supply chain disruptions
- the assessment of certain purchase or sale agreements as onerous contracts
- announcing a plan to discontinue an operation
- announcing, or commencing the implementation of, a major restructuring or downsizing (temporarily or permanently)
- declines in the fair value of investments held after the reporting period (eg pension plan investments)
- abnormally large changes in asset prices or foreign exchange rates, and
- entering into significant commitments or contingencies, such as issuing significant guarantees to related parties.
What is the impact of COVID-19 on 31 March 2020 reporting dates?
By the end of March 2020, it would be extremely difficult to say that the pandemic was not an event that existed and therefore any accounting impact that occurred after this date is not an adjusting event. This means all estimates and forecasts should include the expected impact of COVID-19, including:
- impairment of property, plant and equipment, intangibles, goodwill
- revenue recognition
- deferred taxes
- going concern
- expected credit losses
- inventory obsolescence.
Disclosing adjusting events
Based on guidance issued by some regulators, our recommendation is that reporting entities put all the matters relating to COVID-19 into one part of their financial statements and make sure that the matter of COVID 19 is prominently displayed.
Below is an extract from Macquarie Group Limited in Australia, who disclosed the COVID-19 impact in Note 1 of its 31 March 2020 consolidated financial statements.[i] Under the major note heading called ‘Summary of Significant Accounting policies’ it had a subheading addressing the entity’s ‘Basis of Preparation’ and under that heading a further subheading to draw attention to the impact of COVID-19 on the consolidated entity’s financial statements.
[i] For complete details of the financial statements that were approved for issue in 8 May 2020 please refer to www.macquarie.com
This accounting policy note sends the readers of these financial statements to ten other detailed notes within its consolidated financial statements, therefore illustrating that for this Australian financial institution multiple financial statement areas have been impacted by the pandemic.
To make it clear to the readers of their consolidated financial statements there were not any other material matters that needed to be disclosed, Macquarie made the following disclosure in its final note of its 31 March 2020 consolidated financial statements:
How Grant Thornton can help
Preparers of financial statements will need to be agile and responsive as the situation unfolds. Having access to experts, insights and accurate information as quickly as possible is critical – but your resources may be stretched at this time. We can support you as you navigate through accounting for the impacts of COVID-19 on your business. Now more than ever the need for businesses, their auditor and any other accounting advisors to work closely together is essential. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm.