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The impact of coronavirus on the financial statements

Panicos Constantinou, Partner, Audit

 

The outbreak of the coronavirus has spread throughout the world and is already having a serious economic impact on all businessesfrom travel, tourism, and retail through to manufacturing.

Some businesses may profit from the virus outbreak (for example, manufacturers of face masks, antibacterial cleaning products, toilet paper, etc.) and for others, the virus outbreak may have a neutral impact). In such cases, there are unlikely to be financial reporting consequences for these entities.

But most businesses are likely to see a significant reduction in profits for the foreseeable future until the virus is contained and the ‘panic factor’ subsides.  

This article highlights the financial reporting implications for these entities on 31 December 2019 financial statements, as well as for financial statements for periods ending on or after 31 January 2020.

31 December 2019 financial statements

The coronavirus will have the following impacts on 31 December 2019 financial statements.

Impairment

IAS 36 Impairment of Assets is the accounting standard that outlines the accounting requirements for determining whether non-financial assets are impaired

At the end of each reporting period, entities must assess if there is any indication that a non-financial asset is impaired (paragraph 9), by considering a minimum list of indicators (included at paragraph 12) to determine if there in an impairment ‘trigger’. If there are any impairment ‘triggers’, an ‘impairment test’ must be performed to determine whether the carrying amount of the asset exceeds is recoverable amount. Impairment triggers relating to external factors in paragraph 12, include:

  • Changes in the market – reduction in product demand (e.g. government imposed travel restrictions, restaurant closures, bans on mass gatherings affecting sporting events etc .)
  • Changes in the economic environment (e.g. recession resulting from business closures, souring unemployment etc.)
  • Market capitalisation drops below net carrying amount of assets as financial markets react to worsening economic outlook
  • Idle assets due to reduced product demand.

An impairment test must in any event be performed at least once per year (at the same time each year) for goodwill, indefinite-lived intangible assets and intangible assets that are not yet available for use (paragraph 10).

The coronavirus has in many cases already impacted these triggers but it is unlikely that these triggers were impacted as at 31 December 2019.  The 31 December 2019, forecasts, projections and associated assumptions used for impairment testing at that date would have reflected little or no change as a result of the outbreak. The coronavirus was only announced as a global health emergency on 31 January 2020, following which national governments took action.  In addition, significant measures taken by the Chinese government and private sector organisations did not take place until early 2020. We should not use hindsight knowledge of the coronavirus when making assumptions regarding forecasts and future cash flows for 31 December 2019 impairment tests.

As the significant impact and spread of the virus occurred in 2020 its impact needs to be addressed under IAS 10 Events after the Reporting Period as non-adjusting events. Disclosure is required about the nature and financial effect of the non-adjusting event in 31 December 2019 financial reports.

Examples of disclosure that may be necessary as a result of the coronavirus outbreak include:

Going concern

For the going concern assessment, there is no difference between the assessment for 31 December 2019, and later financial reports. IAS 10 requires entities to consider events both before and after the reporting date.

Entities must therefore consider whether the coronavirus outbreak has caused a significant deterioration in economic conditions such that there is significant uncertainty about its ability to continue as a going concern, or in extreme cases, whether the financial statements should be prepared on a going concern basis.

The financial report should also include disclosure about any matters impacting going concern.

Impacts on 31 January 2020 and subsequent reporting dates

For reporting dates from January 2020 onwards, the outbreak of the coronavirus is no longer ‘an event after the end of the reporting period’ and should be taken into account when preparing financial reports.

Impairment

As noted above, IAS 36, paragraph 9 requires assets to be assessed for impairment triggers at the end of each reporting period.

The forecasts and cash flow projections will reflect the impact of the virus on the entity, and this may have a significant impact on recoverable amounts of its assets. 

Going concern

For the going concern assessment, there is no difference between the assessment for 31 December 2019, and later financial reports. IAS 10 requires entities to consider events both before and after the reporting date.

Entities must therefore consider whether the coronavirus outbreak has caused a significant deterioration in economic conditions such that there is significant uncertainty about its ability to continue as a going concern, or in extreme cases, whether the financial statements should be prepared on a going concern basis.  The financial report should also include disclosure about any matters impacting going concern.