*Source SNG Grant Thornton
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If the widespread impact of COVID-19 began during the entity’s reporting period, the impact will be reflected in its financial statements for that period. However, to the extent that the widespread impact of COVID-19 occurred during the entity’s “subsequent events period” (ie the period between the end of the reporting period and the date when the financial statements are authorised for issue), management must determine how the developments subsequent to the year-end should be reflected in the entity’s financial statements for the period under audit or review.
In accordance with IAS 10 ‘Events after the Reporting Period’, entities are required to distinguish between subsequent events that are adjusting (ie those that provide further evidence of conditions that existed at the balance sheet date) and nonadjusting (ie those that are indicative of conditions that arose after the balance sheet date). Entities are required to adjust the amounts recognised in their financial statements to reflect any adjusting events that occur during the subsequent events period.
Is the impact of COVID-19 an adjusting event for reporting periods ended 31 December 2019 (or prior)?
The impact of COVID-19 is generally a nonadjusting subsequent event for reporting periods ended on or before 31 December 2019. Consequently, there would be no impact on the recognition and measurement of assets and liabilities in an entity’s financial statements. Although cases of the virus in Wuhan City, China were reported to the World Health Organisation (WHO) on 31 December 2019, there was little confirmed evidence of human-to-human transmission at that time and the WHO did not declare the outbreak to be a public health emergency of international concern until 31 January 2020.
As such, it is presumed that the significant development and spread of the COVID-19 did not take place until January 2020. Financial statements for an entity with a reporting period ending on or before 31 December 2019 should only reflect the conditions that existed at 31 December 2019 and must therefore exclude the significant effects of the COVID-19 outbreak.
However, entities will need to determine whether they should make additional disclosures to describe the impacts of the outbreak in the subsequent event period. Generally, disclosure should be made of those events during the subsequent events period that do not relate to conditions that existed at the date of the financial statements but cause significant changes to assets or liabilities in the subsequent period and either will, or may, have a significant effect on the future operations of the entity. For material non-adjusting events, an entity must disclose (a) a description of the nature of the event; and (b) an estimate of the financial effect, or a statement that such an estimate cannot be made. Furthermore, the entity should be taking into account their assessment of going concern and adjust the financial statements as appropriate.
Examples of non-adjusting events that would generally result in disclosure include:
• management’s plans to deal with the effects of the COVID-19 outbreak and whether there is material uncertainty over the entity’s ability to continue as a going concern
• breaches of covenants, waivers or modifications of contractual terms in lending arrangements
• supply chain disruptions
• the assessment of certain purchase or sale agreements as onerous contracts
• announcing a plan to discontinue an operation
• announcing, or commencing the implementation of, a major restructuring or downsizing (temporarily or permanently)
• declines in the fair value of investments held after the reporting period (e.g., pension plan investments)
• abnormally large changes in asset prices or foreign exchange rates, and
• entering into significant commitments or contingencies, such as issuing significant guarantees to related parties.
What is the impact of COVID-19 on financial statements for reporting periods ending after 31 December 2019?
Since late January 2020, the number of COVID-19 cases and countries affected outside of China has grown rapidly, and on 11 March 2020, the WHO declared COVID-19 to be a global pandemic. During this period, national governments and various private sector organisations have taken significant measures to contain the virus, including quarantines and school, store, plant and border closures. Consequences of the outbreak have also contributed to significant volatility in global stock markets since late February 2020.
In our view, for reporting periods subsequent to 31 December 2019 (ie reporting periods ending in 2020), more information was available that preparers and market participants will need to factor into their assumptions and assessments. Accordingly, the later the reporting period is after 31 December 2019, the greater the need to consider whether the impacts of COVID-19 in the subsequent events period should be considered an adjusting event in an entity’s financial statements.
For periods ending after 31 December 2019, entities will need to use their judgement to determine the impact of COVID-19. They need to carefully consider the conditions that were present at the reporting date. This may not necessarily result in entities reaching the same conclusion for the same reporting date. Management should consider the specific circumstances that relate to the entity’s operations and the relevant events that existed in their jurisdiction at that time. For example, some countries have been put on lockdown and people have been told not to leave their homes and some countries have not. If, for example, the entity is in the hospitality industry, this could have a major impact.
Where this judgement has a significant impact on the amounts in the financial statements, it should be disclosed in accordance with IAS 1.
When it is determined that COVID-19 was an event that existed and caused an impact to operations at or before the reporting date, events subsequent to the reporting date should be accounted for as adjusting events.