Accounting implications of COVID-19

Economic effects of COVID-19 may be material for a number of business entities and their suppliers, clients and lenders.

The prolonged epidemic threat increases the risk of economic slowdown, which may affect other reporting and accounting aspects.

Reporting processes need to be supplemented with additional control activities.

Below please find selected areas in need of additional analyses of accounting implications, in particular if the threat lasts longer, which will result in a growing risk of economic slowdown, affecting other reporting and accounting areas, such as:

• impairment of non-financial assets (including goodwill);
• measurement and impairment of inventories;
• measurement of provisions related to onerous contracts;
• probability that deferred tax assets will be realized;
• assessing the risk and potential outcome of breaching bank covenants;
• estimated value of expected credit losses;
• risk that contingent liabilities will materialize;
• going concern;
• post-balance sheet events;
• restructuring provision.

The accounting effects shall depend on entity’s specifics. Certain aspects of financial reporting shall require a detailed analysis, though, due to the impact of the epidemic. These include:

• Impairment of non-current assets (including goodwill): assessment whether an non-current asset or asset group requires the performance of an impairment test. 
• Measurement of inventories: Inventories are measured at the lower of cost and the net realizable value (NRV). Difficult economic conditions may make the NRV calculation complex and necessitate additional analyses. Further, if entity’s output is extremely low (e.g. as a result of temporary production close), verification of the assumed inventory cost may be necessary to ensure that manufacturing expenses do not include items related to unused capacity. 
• Measurement and impairment of receivables: Impairment models with underlying assumptions related to estimates of expected credit losses may require analysis. 
• Analysis of events after the reporting period end: at each reporting period end, but prior to the financial statements approval date, post-balance sheet date information must be thoroughly evaluated. For example, for annual financial statements for periods ended 31 December 2020 or before this date, the response to the COVID-19 epidemic shall be described in disclosures. 
• Analyzing recognition and disclosure methods applied to post-balance sheet events: at the end of each reporting period, a thorough analysis of information obtained after the reporting period end is necessary.
  Going concern: the assessment should include post-balance sheet date events, which may be of importance for entities significantly affected by COVID-19. If the management board is aware of material uncertainty regarding the going concern assumption, additional disclosures will be needed. 
• Please note actions recommended for financial market participants by the European Securities and Markets Authority (ESMA) on 12 March 2020, concerning financial reporting – issuers 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 in their 2019 year-end financial report if these have not yet been finalised or otherwise in their interim financial reporting disclosures.
  
  

Scope of support:

• delegating employees to provide support during preparation of financial statements (if possible in the home office mode);
• consulting regarding preparation of additional disclosures required for annual reports;
• assistance in identification of internal control gaps concerning the reporting process;
• support regarding accounting policy adjustment.

Contact:

Adam Czechanowski

Partner Associate, Audit & Assurance, Deloitte

E-mail: aczechanowski@deloittece.com   

Telephone: +48 664 199 804