Question

Question 1

IAS 10: Events after the Reporting Period addresses two issues: adjusting events, namely, those events that provide evidence of conditions that existed at the end of the reporting period and non-adjusting events: which are those events that are indicative of conditions that arose after the reporting period that need to be reflected in the financial statements. Amounts recognized in the financial statements are adjusted to reflect adjusting events, but only disclosures are required for material non-adjusting events. Management’s judgment is required in determining whether events that took place after the end of the reporting period are adjusting or non- adjusting events. This will be highly dependent on the reporting date and the specific facts and circumstances of each company’s operations. Coronavirus has overwhelmed the world in various ways and at various times. China was the first to announce spread of the virus in November, 2019. UK announced its first case of coronavirus in February, 2020 and Ghana announced its first case in March, 2020. While company A resides in China, company B resides in the UK and C resides in Ghana. Company A’s financial reporting period ends on 31st October each year; company B’s financial reporting period ends on 31st December, each year and company C’s financial reporting period ends on the 31st of March each year. Management of these companies may need to continually review and update the assessments up to the date the financial statements are issued given the fluid nature of the crisis and the uncertainties involved.

You are required to discuss in respect of each of the companies, the potential management conclusions of the impact of the coronavirus on end of year reporting, mindful of IAS 10.

Total Marks: 20marks

Question 2

IAS 1 Presentation of Financial Statements requires management to assess a company’s ability to continue as a going concern. The going concern assessment needs to be performed up to the date on which the financial statements are issued. The assessment relates to at least the first twelve months after the Statement of Financial Position date, or after the date the financial statements will be signed, but the timeframe might need to be extended.

Material uncertainties, for example, the coronavirus effects that cast significant doubt on the company’s ability to operate under the going concern basis need to be disclosed in the financial statements. It is highly likely that many companies large and small, and particularly in certain sectors, will have issues relating to the coronavirus that need to be considered by management. There will be a wide range of factors to take into account in going concern judgments and financial projections including travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of suppliers and customers and their effect on expected profitability and other key financial performance ratios including information that shows whether there will be sufficient liquidity to continue to meet obligations when they are due.

You have been hired to advise management of two companies: one is an airline company and the other is in the pharmaceutical industry on how management should assess the existing and anticipated effects of COVID-19 on each of the company’s activities and the appropriateness of the use of the going concern basis.

Answer 1

Q1.
Company A
Location : China
Virus discovered in November 2019
Financial reporting period ends on October 31st 2019

All events occuring after 31st October 2019 till the Financial Statements are issued by the management are called subsequent events. The Coronavirus crisis is a subsequent event in that respect as it was identified in November 2019. The question is to judge whether there where any conditions that existed as on 31st October, that indicated a viral outbreak. I would say no, as even if a few cases were reported here and there, there was no reliable news indication that a virus of this scale that can affect business existed as at the end of the reporting period. So it is not an adjusting event.

However, it is a material non adjusting event as this crisis has the potential to affect business deeply. Hence it has to be disclosed in the Financial Statements.

Company B
Location : UK
Virus discovered in February 2020
Financial reporting period ends on December 31st 2019

Coronavirus is a subsequent event. A prudent management that follows the news closely would observe that with the outbreak declared in China and slowly spreading to other countries, it is safe to say that conditions indicating Coronavirus reaching UK does exist as at December end, but most companies would overlook this as a single case was not reported in UK and nobody would have guessed it. However, this is an adjusting event as far as balance sheets of British Companies are concerned. Amounts (especially if the company has trade links with China) will have to be adjusted and provisions may have to be created.

Company C
Location: Ghana
Virus discovered in March 2020
Financial reporting period ends on 31st March 2020

In this case, there is no question of subsequent event, as the virus was reported even before the financials could be closed. Hence, necessary corrections and disclosures must be made. IAS 10 per say does not apply in this scenario as it is not a subsequent event.

Q2.
Airline Company

Coronavirus has brought many businesse to a standstill. Due to its virulent nature and ill effects on health of people, major lockdowns have been declared in all countries. This means that incomes may reduce and spending will be rationed by people on only essential services. It is obvious that movement of people will be heavily restricted atleast in the coming 12 months if not more. This will gravely affect the Airline industry in many ways.

The Airline industry is one where capital costs are already large and with rising prises on AirTurbine Fuel, the profit margins are quite low unless you fly with more than 60% capacity atleast. The management will have to analyse key performance and financial ratios to see if the company has enough resources to tide over the crisis. It is to be understood that there will not be ready cash to pay suppliers and this may cause various vendors to cancel contracts with the company. Customers will be very very low and low revenues may not allow the company to cover the fixed costs. It would be difficult to seek Govt. help as their resources would be directed towards the Health and welfare sector due to its need. The only way in which airline industry can be saved is if it has enough finance to tide over the crisis for now.

Hence,as a management advisor I would doubt the ability to continue as a going concern for this company. As per IAS 1, the financial statements cannot be prepared using Going concern basis but rather liquidity basis.

Pharmaceutical Company
In the case of a Pharma Company, the conditions seem favourable. With the rise in Corona cases, medical facilites, equipments and drugs are high in demand in every country, with the country's Govt. ready to pay large sums or even provide grants for procuring life saving drugs and mainly spending on research to test and develop a vaccine that can beat the virus.

If this Pharma Company can make optimum use of their resources and knowledge to maybe even develop a drug, a patent would be highly profitable. This is also one of the reasons if you look at stock market indexes, Pharma Companies have been riding on a high. Obviously the costs for developing a drug and capital required need to be considered.

I would suggest The Pharma Company to prepare its balance sheet on Going Concern basis as the Corona outbreak won't break the company yet assuming all other financial indicators (like normal companies) are favourable.