For reporting periods ending on or after 31 January 2020, the effects of the COVID-19 would need to be incorporated into the preparation of financial statements. The financial reporting implications will depend on the facts and circumstances of each entity.
The following are some of the financial reporting considerations that entities and engagement teams need to consider (list is indicative and not exhaustive).
- The assessment of going concern under the effects of the COVID-19 outbreak will need to incorporate unprecedented shocks to forecasts. It may be appropriate to model multiple scenarios and weigh their likelihood (e.g. in some sectors, ‘worst case’ scenarios included in an assessment may have to consider little to no revenue for extended periods of time if entities are required to cease trading operations).
- Classification of assets and liabilities as current or non-current (e.g. liabilities may become due on demand due to breaches of contractual terms and covenants and therefore will be classified as current liabilities).
- Net realizable values may decrease, resulting in increased impairment.
- Indicators of impairment may exist for assets subject to impairment;
- Value in use calculations may need to be adjusted (e.g. revised cash flows and/or adjusted discount rate);
- Fair value less costs of disposal may decrease and active markets for certain types of assets may disappear.
- Onerous contracts may exist for contractual or constructive obligations;
- Insurance recoveries relating to losses incurred due to the outbreak may not meet recognition requirements in a reporting period (i.e. recovery may not be ‘virtually certain’).
- Sales of non-current assets or disposal groups may not meet the ‘highly probable’ criteria to be classified as held for sale due to disappearance of existing market and/or necessary buyers;
- If entities reduce operations, components that are disposed of or cease operations may meet the definition of discontinued operations and require separate presentation and disclosure.
- Disclosure of credit risk arising from financial assets (e.g. loans receivable, trade receivables, etc.), may need to be expanded significantly due to significant judgments and estimates;
- Disclosure of liquidity risk may need to be expanded;
- Disclosure of defaults and breaches of loans payable require disclosure surrounding the details of the default.
- Increase in ECLs;
- Modifications to financial assets and liabilities (e.g. concessions to payment terms);
- Losses incurred on FGCs.
- The level in the fair value hierarchy for inputs into fair value measurements may shift, in particular from Level 2 to Level 3 with associated enhanced disclosures.
- Possible impairment of RoUA;
- Impairment of lease receivables for lessors;
- Accounting for lease modifications (e.g. concessions by landlords to tenants when operations are interrupted).