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The Impact of Covid-19 on your Annual Financial Statements | Business News Articles
Chartered Accountant & Business Consultant - Meredith Harington

The Impact of Covid-19 on your Annual Financial Statements

The impact of COVID-19 on the world economy has been enormous. The “knock-down” effect of the lockdown in South Africa has been pervasive. For every business affected, there are people who have lost jobs or at best have had significantly reduced income. Reduced income reduces spending power. Reduced spending power reduces income (and therefore profits) to the companies that those individuals would ordinarily have bought from. Those companies in turn can no longer afford to pay their staff and so the cycle continues.

From a company/business financial reporting perspective, the effects of the above needs serious consideration. Preparers of financial statements should provide transparency on the actual and potential impacts of Covid-19, to the extent possible, based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance. Areas that need to be considered are:

  • Post balance sheet events - Firstly, entities will need to determine what the post balance sheet event is – the outbreak of the virus, or the lockdown measures being implemented. Once this has been identified, it needs to be classified as an adjusting event or a non-adjusting event. According to International Accounting Standard 10 Events after the Reporting Period, an adjusting event after the reporting period is one that provides evidence of conditions that existed at that date. Companies must also ensure that non-adjusting events are disclosed within the financial statements, if material. Disclosure should include the nature of the event and an estimate of the financial effect - for example disclosing information about the impact on the carrying amount of assets and labilities and recognition of income and expenses.
  • Recoverability of receivables - Companies are likely to be impacted by the loss of customers and significant reductions in debts being paid due to customer’s experiencing financial or cash flow difficulties. Companies reporting under the IFRS for SME must assess whether, as at the reporting date, there is objective evidence of impairment, such as a customer being in significant financial difficulty or it being probable that a customer will enter bankruptcy, and where there is such evidence, an impairment loss should be recognised.
  • Impairment of property, plant and equipment and intangible assets including goodwill - Companies need to assess whether the impact of Covid-19 triggers an impairment assessment and, if as a result of that, whether an asset impairment has occurred. Where an impairment review is carried out, companies need to consider the impact of Covid-19 on the inputs and assumptions used for financial projections. For instance, management must assess whether a trigger event has occurred, such as the loss of key customer and/or supplier or reduction in financial performance due to disrupted production, and consequently assess the impact on the impairment calculations
  • Going concern statement- Financial statements need to disclose the basis on which management has assessed the company’s ability to continue as a going concern, and where there are any significant concerns, these uncertainties must be disclosed. Entities must consider information available for the next 12 months from the date of the financial statements when assessing whether the going concern assumption is an appropriate basis of preparation. If there are indicators present suggesting that the entity may not be able to continue as a going concern for the foreseeable future, the pandemic will be considered an adjusting post balance sheet event.
  • General - Judgement must be applied in determining which balances are likely to be impacted. Specific facts and circumstances that affected the conditions that existed on or before the reporting date will need to be assessed, to form an expectation of which estimations may change going forward. These matters are expected to require significant estimation and judgement. An entity is required by IAS 1 to disclose any such estimations and judgements made in preparing the financial statements. If material, these disclosures may include disclosures regarding the financial heath and quality of assets; an estimation of the future economic benefits that can be derived from assets; or judgements on whether post balance sheet events are adjusting or non-adjusting events.

In closing, financial reporting in the current environment imposes a significantly greater than normal obligation on management and directors. Greater judgement and application of mind to the principles above will be expected of them.

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