As the impact of COVID-19 continues to unfold in Singapore and around the world, Directors and those preparing financial statements need to be cognisant of not only what’s happening now, but what is likely to happen next. Here’s our 10 ten questions organisations need to ask to ensure that financial statements yet to be issued are presented fairly.
- COVID-19 – the big picture: what should be included in financial statements that have not yet been authorised and approved for issue?
An organisation’s stakeholders will use financial statements to evaluate the magnitude of potential disruptions to their businesses and if any estimates are included, they will want insight into how these were calculated.
- Will the outbreak of COVID-19 result in more disclosures?
Almost certainly yes. In many situations, the outbreak will result in “new” obligations or uncertainties that an entity may not have previously recognised or disclosed in its financial statements. The additional disclosures will not only relate to the revenues, expenses, assets, and liabilities they have already recognised, but also what might end up recognised in subsequent reporting periods
- There has recently been a significant drop in the value of equities so if you have a 31 December balance date, can your financial statements be adjusted for this?
No, because in many instances the relevant accounting standards will not permit this because the fall in value was not a result of fact and circumstances that existed at the balance date. However, what the accounting standards actively encourage is commentary and assessment of the impact of events after the balance date, provided what is disclosed can be reasonably estimated.
- If there is estimation uncertainty, what should be reported in financial statements?
In 31 March 2020 financial statements, for example, businesses will need to pinpoint where accounting estimates have been made and what assumptions were used to determine the amounts that are reflected in the financial statements. For example, a company may have perishable goods that due to market circumstances brought about by COVID-19, will have to be sold for less than it cost to produce them. Having never faced this situation, a range of selling prices exists which means the loss arising from having to write down the value of its inventory will also change. In many instances there will be a range of possible outcomes. Accounting standard setters encourage those preparing financial statements to indicate the sensitivity of any carrying amounts reflected in their financial statements to changes in the assumptions that impact on those carrying amounts. Lastly, if there have been any methodology changes in arriving at those estimated amounts, full disclosure of this should be made.
- How much hindsight can be reflected in financial statements?
Very little. Entities are required to determine amounts based on their knowledge of events at the balance date, not after it. This is particularly important when considering whether assets are impaired or not. The only situation where changes can be made is when additional evidence of conditions that existed at the end of the reporting period are uncovered. So, the determination of the recoverable amounts of an asset can only consider the information obtained after the reporting date if such conditions existed as of the reporting period end. So if your organisation has been severely affected by COVID 19 and plans to restructure its operations in 2020 as a consequence of this, you cannot take this post balance date decision and its economic consequences into account when determining the carrying amount of any assets that you are looking to impair if you have a 31 December 2019 balance date.
- Is it reasonable to take the view “the more uncertain the environment, then more detailed disclosures of the assumptions and assessments used to prepare the financial statements should be made?”
Yes. Those preparing financial statements should always be mindful of who will be reading them and how they might be used. If they anticipate that readers may not agree with their assessments and their assumptions, they should provide enough information to allow them to make their own judgments of what the carrying amounts should be.
- When assessing estimated credit losses (ECL), what should be taken into consideration?
Again, any assessment being made should only be based on information that existed at the reporting date. The expectation set out in accounting standards is that past events, current conditions and the forecast of future economic conditions for any financial asset that is not measured at fair value is clearly communicated in financial statements. ECL is a probability weighted amount that should be determined by evaluating a range of possible outcomes, and this is often overlooked. To make this assessment often takes a considerable amount of time and professional judgment.
- What should be taken into consideration when determining fair values at a reporting date?
The relevant accounting standard is IFRS 13 Fair Value and it states the fair value of an asset or a liability at a measurement date is a specific exit price estimate that is based on assumptions (including those about risks) that market participants would make under current market conditions. Put another way: at the reporting date, what assumptions would market participants have made using all available information, including information that may be obtained through due diligence efforts that are usual and customary? Unobservable inputs will often have to be included to measure fair value to the extent that relevant observable inputs are not available. However, the key point to recognised is that the fair value measurement objective remains the same, i.e., an exit price at the measurement date from the perspective of a market participant.
- How much attention needs to be given to going concern for COVID-19?
A considerable amount. In assessing whether the going concern assumption is appropriate, the accounting profession
requires that all available information about the future, which is at least, but not limited to, twelve months from the date of authorising the financial statements for issue, be considered. One downside is that the longer it takes an entity to complete their financial statements after its balance date, the more information they need to take into consideration. So if the business is being audited, it should work very closely with its auditor to agree the level of analysis and evidence that is appropriate to support whatever going concern is made.
- Ultimately, what impacts of COVID 19 will the users of the financial statements be most interested in?
For many organisations, it will be how have they coped with the outbreak so far. Their focus should be on disclosing in their financial statements, what steps have been taken to contain and minimise the impact of this global event on their operations. Almost every entity with a 31 December 2019 balance date is likely to conclude that this outbreak is a non-adjusting event – but that does not absolve it from fully disclosing the post balance date consequences on the organisation and its future operations and activities. However, if your organisation has a later balance date, say 31 March 2020, then adjustments to the carrying amounts included in your financial statements will almost certainly be required if the organisation is in a position to quantify then. If not, then this should be disclosed as well because the objective of preparing any set of financial statements should be to provide readers with insight not only on the entity’s past activity, but also its current operating situation and its future viability.
Partner and National Technical Director, Audit
Auckland, New Zealand