Besides the serious public health threat that has arisen from the outbreak of the coronavirus which started in Wuhan, China, and quickly spread to other parts of the world, it is also expected to have serious economic impacts on many businesses, including universities, travel, tourism, manufacturing, construction and the retail sector. Businesses reliant on a China supply chain are particularly vulnerable, but there could also be a knock-on effect on many other businesses down the line.
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.
The coronavirus will have the following impacts on 31 December 2019 financial statements.
IAS 36 Impairment of Assets is the accounting standard that outlines the accounting requirements for determining whether non-financial assets are impaired.
An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
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.
Regardless of impairment indicators, an impairment test must 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 is likely to ‘tick many of the boxes’ for impairment triggers relating to external factors in paragraph 12, including:
We therefore need to determine how these impairment triggers impact financial reports for 31 December 2019 interim and annual reporting periods.
Implications:
Impairment testing needs to be performed as usual for 31 December 2019 financial reports. As noted above, IAS 36, paragraph 9, requires assessment of impairment indicators at the end of each reporting period.
Because the significant development and spread of the virus did not take place until January 2020, these issues need to be considered under IAS 10 Events after the Reporting Period as non-adjusting events. Therefore, we should not use hindsight knowledge of the coronavirus when making assumptions regarding forecasts and future cash flows for 31 December 2019 impairment tests. However, disclosure is required about the nature and financial effect of the non-adjusting event in 31 December 2019 financial reports.
Even though the coronavirus was reported to the World Health Organisation on 31 December 2019, it 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. It is therefore expected that at 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.
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.
Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting.
Implications:
Entities must consider whether the coronavirus outbreak has caused a significant deterioration in economic conditions for an entity 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.
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. This is because the announcement by the World Health Organisation of coronavirus as a global health emergency on 31 January 2020 occurred prior to reporting date.
As noted above, IAS 36, paragraph 9 requires assets to be assessed for impairment triggers at the end of each reporting period.
An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
IAS 36, paragraph 9
Implications:
We would expect that forecasts and cash flow projections will change for many entities as a result of the virus, and this may have a significant impact on recoverable amounts of assets, particularly for the industries noted above. As noted in our article on ASIC’s findings from its surveillance of 30 June 2019 financial reports, impairment remains a significant focus area, and we expect ASIC’s focus for 30 June 2020 financial reports will be even more apparent as a result of the virus outbreak.
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.
Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern assumption is still appropriate. If the going concern assumption is no longer appropriate, the effect is so pervasive that this Standard requires a fundamental change in the basis of accounting, rather than an adjustment to the amounts recognised within the original basis of accounting.
IAS 10, paragraph 15
Entities must therefore consider whether the coronavirus outbreak has caused a significant deterioration in economic conditions for an entity 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.
Please read our International Financial Reporting Bulletin for more information.