The coronavirus 2019 (COVID‑19) pandemic is affecting economic
and financial markets, and virtually all industries are facing
challenges associated with the economic conditions resulting from
efforts to address it. For example, many entities in the travel,
hospitality, leisure, and retail industries have seen sharp
declines in revenues due to regulatory and organisational mandates
(e.g. “shelter in place” mandates, school closures) and voluntary
changes in consumer behaviour (e.g. “social distancing”).
As a result of the pandemic, entities are experiencing
conditions often associated with a general economic downturn. This
includes, but is not limited to, financial market volatility and
erosion, deteriorating credit, liquidity concerns, further
increases in government intervention, increasing unemployment,
broad declines in consumer discretionary spending, increasing
inventory levels, reductions in production because of decreased
demand, layoffs and furloughs, and other restructuring activities.
The continuation of these circumstances could result in an even
broader economic downturn which could have a prolonged negative
impact on an entity’s financial results.
In its Statement on Importance of Disclosure about COVID-19
published on May 29, 2020, the International Organization of
Securities Commissions (IOSCO) notes that “particularly in an
environment of heightened uncertainty, it is important that
financial reporting include disclosures that provide an adequate
level of transparency and is entity-specific regarding
uncertainties inherent in judgments and estimates. Disclosures
should explain the material impact on specific assets, liabilities,
liquidity, solvency and going concern issues as relevant and any
significant uncertainties, assumptions, sensitivities, underlying
drivers of results, strategies, risks and future prospects. Telling
the story in a clear manner through the financial statements and
management commentary is important to investors’ information needs
and confidence. Issuers should not limit disclosures to boilerplate
discussion on COVID-19 itself, but to explain; (i) how COVID-19
impacted and/or is expected to impact the financial performance,
financial position and cash flows of the issuer, (ii) how the
strategy and targets of the issuers have been modified to address
the effects of COVID-19 and (iii) measures taken to address and
mitigate the impacts of the pandemic on the issuer”.
This Clearly IFRS discusses certain key IFRS accounting
considerations related to conditions that may result from the
COVID‑19 pandemic. The significance of the individual issues
discussed below will of course vary by industry and by entity, but
we believe that the following topics will be the most pervasive and
difficult to address.
- Preparation of forecast cash flow estimates—The use of
forecast information is pervasive in an entity’s assessment of,
among other things, the impairment of non‑financial assets,
expected credit losses, the recoverability of deferred tax assets
and the entity’s ability to continue as a going concern. Unique
complexities associated with preparing forward‑looking information
as a result of the pandemic and economic downturn include the
following:
- There is an extremely wide range of possible outcomes,
resulting in a particularly high degree of uncertainty about the
ultimate trajectory of the pandemic and the path and time needed
for a return to a “steady state.”
- The associated economic impact of the pandemic is highly
dependent on variables that are difficult to predict. Examples
include the degree to which governments prohibit business and
personal activities, the associated level of compliance by
citizens, the degree to which “flattening the curve” is successful,
and the nature and effectiveness of government assistance.
- Each entity must then translate the effect of those macro
conditions into estimates of its own future cash flows.
Nevertheless, entities will need to do their best to make
reasonable estimates, prepare comprehensive documentation
supporting the basis for such estimates and provide robust
disclosure of the significant judgements exercised, the key
assumptions used and, potentially, their sensitivity to change.
- Recoverability and impairment of assets—Perhaps the
most acute example of the increased challenge associated with
forecast information is the impairment testing for non-financial
assets (for example, property, plant and equipment (PP&E),
right-of-use assets, intangible assets and goodwill). The
impairment test for these assets often requires the development of
cash flow projections that are subject to the significant
uncertainties noted above.
- Accounting for financial assets—There has been a
severe decline in the fair value of many financial assets,
particularly equity securities. Likewise, the ability of debtors to
comply with the terms of loans and similar instruments has been
adversely affected. Entities will need to carefully consider and
apply the appropriate measurement and impairment loss recognition
requirements.
- Contract modifications—Changes in the economic
activity caused by the pandemic will cause many entities to
renegotiate the terms of existing contracts and arrangements.
Examples include contracts with customers, compensation
arrangements with employees, leases and the terms of many financial
assets and liabilities. Entities will need to ensure that the
relevant requirements in IFRS Standards are applied.
- Events after the end of the reporting period—It may be
challenging for an entity to determine if an event after the end of
the reporting period is adjusting or non-adjusting in a global
marketplace that is extremely volatile and in which major
developments occur daily (e.g. announcements of government stimuli
and restrictions) and the stock market’s daily reaction to new
information. Although entities may not have all facts “on hand” at
the reporting date, once such facts are gathered an assessment must
be based on conditions as they existed at the reporting date. The
amounts in the financial statements must be adjusted only to
reflect subsequent events that provide evidence of conditions that
existed at the reporting date. With respect to reporting periods
ending on or before December 31, 2019, it is generally appropriate
to consider that the effects of the COVID-19 outbreak on an entity
are the result of events that arose after the reporting date, for
example decisions made in response to the COVID-19 outbreak, that
may require disclosure in the financial statements, but would not
affect the amounts recognised. For subsequent reporting periods,
the effects of the COVID-19 pandemic may affect the recognition and
measurement of assets and liabilities in the financial statements.
This will be highly dependent on the reporting date, the specific
circumstances of the entity’s operations and the particular events
under consideration.
- Going concern—As a result of COVID-19 and its
associated effects, entities need to consider whether, in their
specific circumstances, they have the ability to continue as a
going concern for at least, but not limited to, 12 months from the
reporting date. Management’s assessment of the entity’s ability to
continue as a going concern involves making a judgement, at a
particular point in time, about inherently uncertain future
outcomes of events or conditions. This will require an entity to
consider, among other things, (1) the extent of operational
disruption; (2) potential diminished demand for products or
services; (3) contractual obligations due or anticipated within one
year; (4) potential liquidity and working capital shortfalls; and
(5) access to existing sources of capital (e.g. available line of
credit, government aid). In making its going concern assessment,
IAS 10 Events after the Reporting Period requires an
entity to consider events up to the date of authorisation of the
financial statements. In certain jurisdictions, regulations may
extend this period (e.g. until presentation of the financial
statements at an annual shareholders’ meeting).
Entities must carefully consider their unique circumstances and
risk exposures when analysing how recent events may affect their
financial statements. Specifically, financial statement disclosures
will need to convey the material effects of the COVID-19
pandemic.