How will coronavirus impact financial statements for annual and interim periods ending 31 January 2020 onwards?
In our March 2020 edition of Accounting News, we noted that the impact of the coronavirus (COVID-19) would largely be disclosed as a ‘non-adjusting’ subsequent event in 31 December 2019 financial statements.
For periods ending 31 January 2020 onwards (which is the date that international governments started to take actions, such as travel bans), the effects of COVID-19 will need to be incorporated when preparing financial statements.
The effects of COVID-19 are likely to be very wide spread, and relate to many industries. They are not limited to entities operating directly in the travel and tourism industry (e.g. airlines, tour operators, etc.). Entities operating in industries where ‘social distancing’ is difficult (e.g. hospitality, fitness, beauty therapy and retail to name a few) are also impacted by mandatory or voluntary closures. Some of the COVID-19 impacts include:
- Reduced consumer demand for goods and services due to lost income and/or restrictions on consumers’ ability to move freely
- Lack of investment in capital improvements and construction reducing demand for many goods and services
- Reduction in market prices for commodities and financial assets, including equity and debt instruments, and
- Disruption of global supply chains due to restrictions placed on the movement of people and goods.
Some COVID-19 impacts will still be ‘non-adjusting’ events after the reporting date
The rule of thumb for financial statements with reporting dates ending on or after 31 January 2020 is that COVID-19 will impact amounts recognised in financial statements. However, as events evolve over the next few months, it may sometimes be difficult to determine whether changing facts and circumstances should be incorporated when measuring transactions and balances at reporting date, or whether disclosure as a ‘non-adjusting’ subsequent event is appropriate.
Example
Beauty Parlour has a 31 January 2020 year-end. Business continued ‘as usual’ until ‘social distancing’ rules were introduced during March. Beauty Parlour was forced to close on 24 March 2020.
In its 31 January 2020 financial statements, the impact of COVID-19 is likely to be limited to disclosure as a ‘non-adjusting’ subsequent event because at 31 January 2020, it is unlikely that the operations of Beauty Parlour would have been impacted by COVID-19. However, if Beauty Parlour’s reporting date was 31 March, the mandatory shutdown on 24 March would result in assumptions about COVID-19 being incorporated into the measurement of transactions and balances at 31 March 2020.
Impacts on interim financial statements
Measurement
For entities preparing interim financial statements for the six months ended 30 June 2020, the effects of COVID-19 are most likely to be apparent and revised forecasts and projections will be incorporated when measuring asset values, etc.
Disclosure
Typically, interim financial statements do not include all the notes typically included in annual financial statements, and are intended to provide users with an update about events that have occurred during the interim (six-month) period since the last balance sheet date.
Given the wide spread impacts expected from COVID-19, disclosures about the impacts of COVID-19 on an entity’s transactions and balances during the interim period need to be comprehensive (i.e. more than what we would usually see in times when it is ‘business as usual’). Where measurement has been impacted, for example, impairment of non-financial assets, preparers should be looking to the disclosure requirements in the relevant accounting standard (in this case, IAS 36 Impairment of Assets).
No reversal of goodwill impairment
If there are impairment triggers at reporting date, IAS 36, paragraph 9 requires entities to perform an impairment test to assess whether the recoverable amount is less than carrying amount.
The requirement to assess impairment triggers at each reporting date is in addition to the requirement to perform an ‘annual impairment test’ for goodwill. This means that goodwill could be tested for impairment more than once a year. For example, an entity with a December year-end may have performed the annual impairment test for goodwill on 31 December 2019 (with no COVID-19 impacts). However, at the interim reporting date (30 June 2020), goodwill must be tested for impairment again because of the COVID-19 impairment trigger.
Impairment losses recognised on assets such as property, plant and equipment (PPE) and identifiable intangible assets are permitted to be reversed in subsequent reporting periods. For example, if a vaccine for COVID-19 becomes available in November 2020, an entity with a December year-end that wrote down its PPE and identifiable intangibles in its 30 June 2020 interim financial statements can reverse the impairment losses if revised forecasts and projections support the reversal at 31 December 2020.
This is not the case for goodwill. Impairment losses recognised against goodwill in one period cannot be reversed in another. IFRIC 10 Interim Financial Reporting and Impairment states that no such reversal may occur for goodwill because IAS 36 does not permit an impairment recorded against the value of goodwill to be reversed.
More information
Please read our International Financial Reporting Bulletin for more information.