Impact of Melbourne Stage 3 & 4 lockdowns on amounts recognised in 30 June 2020 financial statements and going concern assessments

Victorian and many other Australian businesses will be impacted by the Victorian COVID-19 lockdowns. In light of this, the Australian Securities and Investments Commission (ASIC) recently published another of its COVID-19 FAQs, FAQ 2A, to provide guidance on the expected impacts on 30 June 2020 financial statements.

Key dates

The impact of these events on businesses will depend on how much exposure they have to the Victorian market, for example, supply chain issues and customers having to close their businesses. Although these events occurred after 30 June 2020, they may nevertheless impact an entity’s assessment at 30 June 2020 of:

• Asset values (e.g. when performing impairment testing for non-financial assets and expected credit losses on loans and receivables, and determining fair values of investment assets), and
• Solvency and going concern.

Impact on impairment testing and asset values

When determining asset fair values or performing impairment testing, entities should have regard to conditions existing at 30 June 2020, as well as future expectations at that date (i.e. 30 June 2020 – not using hindsight). Assumptions used should be supportable and reasonable.

Actual events that occurred after 30 June 2020 may be regarded as more or less predictable at reporting date (30 June 2020), particularly if they occurred soon after balance date rather than later.

When determining discounted future cash flows in calculating asset values and for the impairment of non-financial assets and expected credit losses on loans and receivables as at 30 June 2020, entities will need to assess the likelihood of future changes to lockdown restrictions, and probability-weight different cash flow scenario outcomes as follows:

• Melbourne-wide Stage 3 restrictions - expected to be included in asset values in a high proportion of probability weighted scenarios and given greater weight given that 36 suburbs in ten Melbourne postcodes were already under Stage 3 restrictions with the number of reported infections growing at 30 June 2020
• Melbourne-wide Stage 4 restrictions and Regional Victoria Stage 3 restrictions (announced 2 August 2020) – lower expectations at 30 June 2020 that these would come into force because it was expected that Stage 3 restrictions would control the outbreaks - should be factored into a small proportion of probability weighted scenarios and given a low weighting.

Disclosures

The extent to which these events have been factored into impairment calculations is a key estimate and judgement that must be disclosed in the notes to the financial statements as required by AASB 101 Presentation of Financial Statements.

The notes to the financial statements should also disclose the impacts (nature and estimate of financial effect) of subsequent events to the extent that those impacts have not been fully reflected in asset values at 30 June 2020.

Solvency and going concern

The events described above are included in probability-weighted cash flow scenarios to the extent that their likelihood was anticipated at 30 June 2020. However, these events are taken into account for solvency and going concern assessments which must be made based on:

• Conditions that exist when finalising the financial report, including the impact of all events that occurred prior to that date (e.g. the Stage 4 lock downs), and
• Expectations of future events.

Changes ‘job keeper’ payments

FAQ 2A also covers the extension of job keeper payments through to March 2021, which was announced on 23 July 2020, and updated again on 7 August 2020. Changes to ‘job keeper’ arrangements will be considered when assessing solvency and going concern for 30 June 2020 financial statements.

When assessing impairment of non-financial assets and expected credit losses on loans and receivables at 30 June 2020, the expectation of some extension of ‘job keeper’ payments should be considered for a proportion of probability weighted scenarios and given some weight.