COVID-19 – Impact on Accounting & Financial Reporting

COVID-19 has caused a global health pandemic and brought challenging consequences to our society. As the situation is changing rapidly, the spread of the virus which had impacted certain industries initially is now creating considerable uncertainty for the world economy and financial markets. Extraordinary effort has been deployed to mitigate the flow-on implications brought on by this major global health risk.

The risks and implications of the current situation has created additional accounting and financial consequences from a reporting perspective and those charged with governance need to re-visit how these affect their business.

The current situation may cause significant interruptions to business activities resulting in a decline in sales, cashflow constraints, broken supply chains, ceased production or services, inability to retain key staff, inability to obtain financing etc. For some businesses, there may be material uncertainty that casts significant doubt on the ability to continue as a going concern. These businesses will need to consider disclosing those material uncertainties in the financial statements. The assessment of going concern must consider events that have occurred after the end of the financial reporting period up to the date of signing the report.

Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. The two types of events are adjusting events and non-adjusting events.

For example, if the December 2019 year-end financial report is yet to be authorised, businesses and those charged with governance must assess the available information to decide whether adjustments or disclosures are required before sign-off. Given the potential impact caused by COVID-19, some businesses may consider there are events subsequent to the balance date that will require an adjustment to the financial statements. These may include provision for doubtful debts, provision for onerous contracts and fair value adjustments for non-recoverable investments or other assets. For other businesses subsequent events may be considered non-adjusting but require disclosure of the nature of the event, an estimate of its financial effect, or a statement that such an estimate cannot be made. This disclosure should be transparent and specific to the business.

The implications brought on by COVID-19 could have a significant impact on performance and future cashflow of business assets. Financial Reporting Standards require entities to consider any indicators that assets may be impaired or whether the carrying amount exceeds the recoverable amount. Economy lockdowns, pause on production, changing trade and contract conditions would trigger an impairment assessment of assets in addition to the regular annual impairment test.

As the impact of COVID-19 is felt across the economy, the major lending institutions have undertaken to offer their support to customers during this difficult time. Although the risk of lenders exercising penalty provisions has been reduced, it is still essential to assess the financial reporting impact of covenant breaches. It is expected that borrowings would all be classified as ‘current’ in the financial statements as businesses would have no ability to defer repayment in the absence of any special clause in agreements.

The difficulty in maintaining sustainable cashflow for many businesses effected by the current situation has inevitably increased. This includes the ability for customers to pay debts when they fall due. This will no doubt result in late or no payments from customers for a period of time. Businesses should allow sufficient provision for delinquencies and ensure effective communication with customers to manage liquidity for the financial viability of the business.

Businesses are required to report their inventory value at the lower of cost or net realisable value (NRV). Businesses operating in non-essential goods and service industries that have experienced significant reductions in sales should consider whether the value of their existing inventory has deteriorated and assess if any additional provision for obsolescence is required.

Should future production volumes be affected, the inventory valuation model should also be revisited where fixed overheads are re-allocated to reflect the current production volume.

Some businesses may be forced to downsize or temporarily close their operations during this time of uncertainty. Provisions for any potential costs associated with this restructuring needs to be considered along with appropriate recognition of employee termination entitlements.

Many regulators have offered lodgement extensions and relief in supporting businesses experiencing difficulties meeting their obligations due to COVID-19. Management and those charged with governance should continue to observe updates or new developments and effectively communicate with their members and the relevant regulator to ensure compliance.

This is unprecedented times for our society and businesses. It requires our collaborative effort more than ever. Our firm has allocated significant resources for our clients to ensure all queries and concerns can be addressed by our team as soon as possible. If you have any queries in relation to this article, contact our Audit Specialists for more information on (03) 9835 8200.