Perspectives
How COVID-19 infects financial reporting and results presentations
Q1 2020
1. Background
The first quarter of 2020 was, for many companies, one of the most challenging in a very long time. While most economies continued their moderate growth path at the beginning of 2020, this stalled mid-March with the outbreak of the COVID-19 pandemic in most parts of the world. Many governments reacted with restrictions of economic activities, which have no precedence in recent history: from disruptions in conducting day-to-day business to a complete lockdown of certain industries and activities.
The financial effect for reporting periods ending 31 March 2020 might be limited for most industries due to the short amount of time between the end of the reporting period and the global outbreak of the pandemic. However the impact on the coming reporting season could be significant: the larger than expected downturn of economically large countries, the uncertainty about the further development of the pandemic and the widespread effect on sales, supply chain and financial markets and other areas add significant uncertainties to the financial results and outlooks which need careful consideration in investor communication.
Although the knowledge about the pandemic has increased, and infection rates have decreased significantly in many parts of the world, it remains a major risk for the rest of the year and probably beyond. With the upcoming reporting season as of 30 June 2020, we believe it is a good time to provide some insights in to how companies have dealt with this major reporting challenge at the end of the first quarter 2020 and to provide some guidance and recommendations for the upcoming financial results releases.
For this, we have reviewed the shareholder communications of 44 of the largest publicly traded companies in Switzerland, Germany and the UK as of March 31, 2020. We have focused our review on the non-financial sector, as we believe this sector is affected differently than the financial sector.
We have analysed the following questions:
- How much were important KPIs already impacted in Q1?
- What were the pandemic effects on financial results and how detailed have the effects been disclosed?
- What measures / mitigations of the business risks have been taken and communicated to the shareholders?
- What was the effect the management's guidance and outlook, if any, and how was the uncertainty communicated?
2. Sample group and information provided
We have selected 44 companies in the sample of which 12 are from the UK, 17 from Switzerland and 15 from Germany across the following industries: pharmaceuticals, chemicals, consumer goods, transport & logistics, telecommunications, travel & leisure and other services.
Of these 44 companies, four have issued no financial results in Q1/2020 (3 from Switzerland , 1 UK). A further three companies had their financial year end in March 2020 and have been included in the review sample. Of the remaining 37 companies, 25 (56% of the total sample) have issued full interim financial statements in compliance with IFRS or US GAAP respectively. The remaining 12 (27%) companies have issued limited financial results (sales reports, production reports etc.)
In our review we have also taken into account any other information provided to the shareholders/analysts regarding the quarterly results, particularly analysts calls/conferences presentation, press releases etc.
Table 1: Sample group by Industry
3. Impact on results and industries
Although the pandemic is a global issue the effects on the industries in the first quarter 2020 was quite different. The impact on revenues was moderate due to the short time period in Q1, as the pandemic became a global challenge in mid-March. However, the impact on companies’ results were already very significant and widely distributed.
Even though our sample is not statistically representative, it clearly shows the different impacts by industry. Consumer goods, travel & leisure are immediately and directly impacted by the lockdown. The mining/commodities industry was mainly affected by the sharp drop in oil prices and significantly weaker demand. Automobiles mainly suffered from a sharp decrease in demand, particularly in the important Asia-Pacific region, where the whole first quarter was affected.
Table 2: Change of revenues and profits in Q1 2020 compared to Q1 2019 in the sample group
Other industries, like life science showed a positive impact mainly based on stock piling effects. The telecommunication sector benefited from the higher demand of high speed data transmission capacity due to the social distancing requirements in many countries, although individual effects were significantly different, depending on the company’s reliance on retail sales.
With this diverse and volatile development and the high degree of uncertainties for the next months, it is very important to communicate in a transparent and concise way with shareholders in order to provide them sufficient insights relevant to their investment decisions.
Potential impacts of COVID-19
The potential impacts are widespread and range from short-term immediate effects (such as shop closures) to longer term and indirect effects (such as a change in business models). For shareholders and users of the financial statements it is important to understand the impacts on the business and their consequences on the financial figures.
As these uncertainties and the related effects on the economy might last a longer time, companies might want to develop a strategy for their way of reporting in the current situation. To provide some insights in potential approaches and orientation we conducted this survey of the first quarter 2020 reporting of the 44 selected public companies.
4. Reporting approaches
4.1. The relevance of information and general approaches
Existing and potential shareholders are making an investment decision based on published financial reporting. It is crucial for them to understand how the pandemic effects the company and what the financial impacts of the pandemic are. Investment decisions are based on estimated future cash flows, which means the information provided should enable the users of financial statements to understand the current and past results, and to form an opinion about the future returns.
In terms of financial performance, the income statement presenting net income and more importantly an operating profit or loss is crucial. An operating result reported under IFRS, US GAAP or Swiss GAAP FER is supposed to reflect a true and fair view of past performance. However, additional information is necessary to provide an understanding of the drivers of performance and to form a basis for future projections.
In this regard, companies commonly make use of so-called alternative performance measures (“APM”) or non-GAAP measures. These are performance measures not governed by an accounting standard. Common examples are EBIT, EBITDA, adjusted EBIT, core operating EBIT and the like. Companies commonly use these figures to show an operating result, which is in their view, sustainable and hence free of infrequent or non-recurring events and transactions. An EBIT/EBITDA adjusted for restructuring expenses or for acquisition related expenses is a common example.
The COVID-19 pandemic is a new, very unique and infrequent event. The last comparable event probably was the Spanish Flu in 1918. Many companies might have thought of adjusting their existing APMs, or introducing new APMs to exclude the related pandemic effects on the financial results and to enable the users of financial information to form a view about the future results. Considering that the potential effects are widespread, persistent and pervasive to the financial situation (refer to picture 1) it is however, difficult, if not impossible to isolate the effects of the COVID-19 pandemic on the financial results and to eliminate these effects for a consistent presentation of the APMs. Accordingly in April 2020 the European Securities and Markets Authority ("ESMA") has amended its Q&A on the Guidelines on Alternative Performance Measures, stating that “it may not be appropriate to include new APMs or to adjust previously used AMPs when the impacts of COVID-19 have a pervasive effect on the overall financial performance..:”
Although this directive is not directly applicable in Switzerland, the SIX Directive Alternative Performance Measures also requires transparency and consistency, which merits using the ESMA guidance. Additionally, capital markets participants expect comparative information. It is therefore not recommended to adjust existing APMs or to introduce new APMs to disclose the effect of the pandemic. It is rather recommended to extend the existing disclosures (e.g. business development, liquidity impairments, net realisable value, segment reporting etc.) to provide useful and relevant information to the users of financial statements and interim/annual reports.
In the following, we highlight some approaches we believe are best practices in the sample. We have included information presented in the interim reports, investor presentations and other related documents for the first quarter 2020.
4.2. Revenue and profitability
The pandemic led to an unprecedented lockdown of the global economy. This resulted in whole industries not being able to sell their products and services to customers, disruptions in the production process and supply chain, significant uncertainty with plummeting demands.
Of course, it is almost impossible to isolate the effects of COVID-19 on the revenue development (lost revenue). However, companies used different approaches to make the related impacts transparent to its users. Most of the companies used a mix of quantitative and qualitative information.
Except one company, all companies, which issued full or interim financial reports made a general reference to COVID-19 and how it affected their business. These disclosures ranged from richly detailed to basic general information.
In our reviewed sample group, we have observed the following distribution of details presented:
Table 3: Details on Q1 effect
It is striking that more than half of companies provided no or just very general insights into the effects of the COVID-19 pandemic. However, this might be due to the short time frame of the outburst and the preparation and presentation of the quarterly / annual results as of March 31, 2020. We would expect that more detailed and specifically quantitative information be provided for the half-year reports.
Those companies which provided more insights took different approaches by presenting information in the interim reports and investor relations presentations.
Example 1: Significant events disclosure
Source: Deutsche Telekom AG, Interim Report Q1 2020,
Deutsche Telekom AG added an additional section to their general disclosures; specifically describing the potential impacts on their different business units. These qualitative statements were supported by more quantitative information in the investor presentation.
Example 2: Quantitative information on the impacts
Source: Deutsche Telekom AG, Q1 2020 results presentation
As the outbreak of the pandemic outside China and the related measures taken by governments were close to the reporting date at quarter end, these disclosures provide relevant information to users of the financial statement. They offer a much clearer view on the current and potential magnitude on the different business units and the related financial effects.
Novartis on the other hand experienced a positive effect on the quarterly results as the lockdowns and the related supply chain disruptions, particularly in the pharmaceutical industry, resulted in stock piling behavior in many countries to maintain supply with important drugs during the lockdown. Novartis estimated the quantification of the effect and presented the development of important key ratios as an amendment to the APM reconciliation.
Example 3: Estimated COVID-19 impact on net sales and core operating income growth and margin
Source: Novartis, Interim Financial Report, Quarter 1 2020, p. 55,
We believe these examples are good approaches to provide users of financial statements with relevant qualitative and quantitative information.
In a rapidly changing environment, it is important to know when the related estimated effects and assessment of the company has been made. We therefore recommend, although not specifically required by IAS 34 and Swiss GAAP FER 31, to disclose the date when the issuance of the interim report has been approved. Although none of the 25 companies, which issue full interim financial reports, explicitly disclosed the date for approval for issuance in the notes, all companies included somewhere in the report a date which can be considered as the approval for issuance date.
A clearer statement in a separate paragraph would help users to find this information more easily.
4.3. Effects on financial position
Despite the effects on revenues and profitability, the COVID-19 related effects might also have a significant impact on the financial position. The significant downturn of the global economy and the high degree of uncertainty might be a triggering event for impairment testing for many companies and industries. Even if companies believe, it is likely that they have to re-revise their projections again at year-end because of significantly less uncertainties which might result in a reversal of a goodwill impairment, IFRIC 10 explicitly requires to recognise an impairment in the interim period and prohibits a reversal at a later period in the same reporting year.
Other potential assets which might be affected are inventories because of the required lockdowns and weaker demand. Trade receivables might require higher provisions because of an increase in the credit risk due to higher unemployment rates and the economic downturn.
Only 9 companies reported significant impairments in Q1, from which only one made an explicit connection to the COVID-19 effects.
From the rest of the companies with no significant impairments, some explicitly stated that they have conducted a review based on the events, but no impairment needed to be recognised.
Example 4: Explicit statement regarding triggering events
The Kuehne + Nagel Group has analysed whether any triggering events can be identified, that would indicate an impairment of its assets. As of March 31, 2020, no impairment of assets needs to be recognised.
Source: Kühne + Nagel Interim Financial Statements Q1 2020, p. 8,
Slightly more detailed information was provided by Volkswagen AG
Example 5: Approach taken on impairment review
Last year's impairment tests of intangible assets, especially goodwill, and of property, plant and equipment were reviewed as of March 31, 2020 to verify the carrying amounts of these assets. Since Volkswagen currently assumes that the pandemic is a temporary event and will not have any lasting negative impact on the Group's long-term business performance, a number of different scenarios have been drawn up for 2020 for comparison with the most recently approved plans. Please refer to our comments in the interim management report for information on the developments expected in the global automotive markets. Furthermore, the weighed average cost of capital (WACC) has been adjusted to March 31, 2020 and individual parameters for financial assets have also been adjusted. Overall, the review has not led to any material additional impairment losses on assets.
Source: Volkswagen AG, Interim Financial Statements Q1 2020, p. 34,
Due to the high degree of uncertainties, more quantitative data to help users assessing the risk of potential impairments would be helpful, especially disclosure of the significant input factors, sensitivity analysis and headroom, especially in industries and businesses severely affected by the COVID-19 pandemic.
While none of the reviewed companies made an explicit statement of inventory write-downs due to COVID-19, some companies referred to the increased expected credit losses.
Example 6: Increase in expected credit losses
Source: BT Group plc., Annual Report 2020, p. 158,
4.4. Liquidity and net debt
The significant downturn of economic activity, in connection with the uncertainty of the speed and strength of a recovery, will very likely increase the focus of investors more on the liquidity situation of a company. This might even be true for companies for which liquidity was not a significant risk in the recent past.
Example 7: Impact on liquidity
Consideration in repsect of COVID 19 (coronavirus) and the current economic environment
The impact of COVID-19 and the current economic environment on the basis of preparation of this interim financial information has been considered. The directors continue to consider it appropriate to adopt the going concern basis of accounting in preparing the interim financial information. Forecast liquidity has been assessed under a number of stressed scenarios and a reverse stress test performed to support this assertion.
Source: BP Q1 2020 results, p. 17
Only 18% of the companies in the sample have explicitly stated securing liquidity as a key measure in connection with the COVID-19 crisis. However, most of the companies mentioned the availability of additional funding to secure liquidity during the crisis.
Example 8: Activities to strengthen liquidity
Daimler signs €12 billion credit agreement
On April1, Daimler AG has increased its financial flexibility with a further credit line of €12 billion. This is in addition to the existing, not yet utilized, €11 billion revolving credit facility with a term until 2025 including extension options. The additional credit line was agreed with a consortium of international banks and can be utilized in a twelve-month period with two sixmonth extension options.
Source: Daimler AG, Q1 2020 Report, p. 20,
The decrease in cash inflows due to reduced sales together with the capital markets deterioration makes net debt and maturity management more important for most of the companies. We observed many companies expanded their existing disclosures / presentation regarding these topics.
Example 9: Net debt and maturity management
Source: Deutsche Telekom AG, Q1 2020 presentation, p. 34,
We believe that these topics will gain more attention from analysts and investors during the year, with tightened capital markets and the continuance of weak demand.
4.5. Measures taken and responses to the crisis
In addition to providing sufficient insights into the pandemic’s impact on the results, the explanation of measures taken to mitigate the current risks will help analysts and shareholders to make an assessment about the future perspective of the company. The most common activities mentioned in our sample were:
Table 4: Measures taken by companies
These measures are usually contained in the management / business development report, when full interim financial reports are issued, or in the Q1 results presentation if only limited financial information were issued.
The level of detail varies significantly among the companies. Whereas some only provide general statements, others provide qualitative or quantitative details about the respective measures taken.
Table 5: Provision of details regarding measures
The more details provided, obviously puts the users in a better position to make assessments about the future and to adjust their projections.
Example 10: Qualitative and quantitative explanation of the measures
COVID-19 situation and management actions:
- Passenger capacity has been reduced by 94 per cent from late March with most aircraft grounded and those retained for operating limited passenger, repatriation and cargo-only flights being appropriately-sized and new-generation, where practical
- Going into the crisis, IAG had a strong balance sheet and liquidity, with cash and undrawn facilities at 31st March of €9.5 billion and at 30th April increasing to €10.0 billion
- Actions have been taken to boost liquidity, such as accessing the UK’s Coronavirus Corporate Finance Facility (CCFF) and Spain’s Instituto de Crédito Oficial (‘ICO’) facility and extending British Airways’ Revolving Credit Facility
- For April and May the normal run-rate cash operating costs have been reduced from €440 million per week to €200 million per week
- Capital spending for 2020 has been reduced by €1.2 billion, with most of the remaining €3.0 billion covered by committedand agreed financing
Source: International Consolidated Airlines, Three Months Results Announcements,
Many companies also use this opportunity to explain measures they have taken for employees and the community as an extension of their corporate social responsibility reporting. While the measures to protect employees were clearly in the focus of most companies, many reported about their activities to support the wider community.
Example 11: Activities to support community
We have also provided substancial support in areas affected by COVID-19, such as through donations of money, medicines and medical supplies and the provisions of testingequipment from our laboratories, complemented by exceptional efforts on the part of our employees.
Source: Bayer AG, Quarterly Statement of First Quarter 2020, p. 3,
4.6 Dealing with the uncertainty
One of the most important aspects to consider when making an investment decision is the outlook into the future. While the historical financial numbers provide insights into the key drivers for past performance, their most significant relevance for an investment decisions is to provide the basis for future projections. In this regard, the disclosure and explanation of the impacts of the pandemic is of major importance.
The limited amount of time to gather experience with the new challenges and the high degree of uncertainty is probably the reason for the great number of companies making no or just very limited information regarding impacts on the current year guidance.
Table 6: Impact on outlook
One of the most comprehensive examples observed in the sample, particularly explaining the approach of dealing with the high degree of uncertainties, was provided by BMW.
Example 12: Assumptions used for outlook
A swift recovery seems unlikely. In its revised forecast, the BMW Group now only expects the business environment to begin stabilising in the course of the third quarter. A longer and deeper recession in major markets, a more severe economic slow-down in China as a result of recessions in other parts of the world, significant market distortions due to an even stronger competitive environment and possible implications caused by a second wave of infections and associated containment measures are not included in the revised outlook.
The overall very unclear situation makes it difficult to provide an accurate forecast and has led to a broadening of the applied scenarios. This is reflected in the corresponding expansion of the target range for the EBIT margin in the Automotive segment for 2020.
The impact of the revised and broadened scenarios on the outlook for the current year was further explained for the overall group and subsequently for each business unit.
Example 13: Adjusted outlook
Overall assessment by Group management
Within a volatile environment, currently overshadowed by the global spread of coronavirus, business is expected to develop negatively during the financial year 2020. Despite the expectation that numerous new automobile and motorcycle models as well as individual mobility-related services would normally generate additional momentum, the various burdens on the global economy described above are likely to have a significant offsetting impact. Research and development expenses will remain at a high level to propel forward-looking projects. In light of the negative impact of the worldwide corona crisis, profit before tax during the period covered by the outlook is likely to decrease significantly.
Due to the negative consequences of the spread of the virus, Automotive segment deliveries to customers are likely to be significantly lower than in the previous financial year. Influenced by the negative factors described above, the Automotive segment’s EBIT margin is expected to be within a target range of 0 and 3% in 2020. Furthermore, the RoCE in this segment is likely to be significantly lower than one year earlier. At the same time, fleet carbon dioxide emissions* are forecast to drop significantly.
With the passage of time and the experience gained of the current situation, most users of financial information will expect more detailed information on outlook and current year guidance in the half-year reports. This applies particularly to information around the scenarios used to consider the high degree of uncertainties and the impact on the results, similar to the example provided by BMW. Providing a range of possible outcomes is more informative than a general statement that no guidance can be provided due to the high degree of uncertainties.
4.7. Other useful disclosure approaches and best practice examples
Providing insightful and relevant information is a major challenge in a complex world, even without events like the COVID-19 pandemic. Companies should do their best to guide users of financial statements through the maze of complex financial information. With an event like COVID-19, it becomes essential.
The effects of COVID-19 on financial information are pervasive and accordingly the related information are scattered over the different aspects of the financial information (impact on revenue, results, impairment, financial instruments etc.). Users of financial information looking for a concise overview of the impacts of this major event will appreciate a summary of the main impacts at the beginning of the financial information section.
Example: Overall summary:
Effects of the COVID-19 pandemic on accounting in the reporting period
It is not currently possible to predict the long-term economic consequences of the COVID-19 pandemic and the stabilization measures that have been introduced. On the basis of the information available in the reporting period, an analysis of the effects on the accounting of the Continental Group was carried out as at March 31, 2020.
- Financial instruments: The effects of the COVID-19 pandemic on possible credit losses cannot be reliably determined at this time. The Continental Group regularly reviews the expected credit loss model pursuant to IFRS 9 in order to identify potential effects on the model and make any necessary adjustments. A review based on the information currently available did not reveal any need for adjustment as at March 31, 2020.
- Goodwill impairment test: Based on the currently determined weighted average cost of capital (WACC), the underlying planning data and the currently expected possible effects of the COVID-19 pandemic, there was no need for adjustment as at March 31, 2020.
- Leases: As a result of the COVID-19 pandemic, changes to lease payments may lead to the different accounting treatment of individual leases. All relevant matters have been reviewed by the Continental Group and accounted for in accordance with the requirements of IFRS 16. As at March 31, 2020, there was no material need for adjustment.
- Employee benefits: The review of the defined actuarial assumptions for employee benefits, including the interest rate, did not result in any need for adjustment as at March 31, 2020.
The Continental Group will continuously review the possible effects on accounting with respect to further developments of the COVID-19 pandemic.
Source: Continental AG, Interim Financial Report Q1 2020, p.32,
This helps users to focus on the relevant aspects and refers them to the related topics quickly, if further insights are required.
Another great example we observed is the use of pictograms to highlight the relevant sections in the financial information.
Example: Use of pictograms
Source: BT Group plc, Annual Report 2020, p. 144,
BT used this pictogram throughout its 200 pages March 31,2020 annual report, making it very easy for users to find the relevant sections with further information on the COVID-19 related topics.
5. Key take away
The COVID-19 pandemic is a major event with no precedence in recent history, which will have significant effects on many businesses all over the globe for an undetermined period of time. It might even lead to reconsideration of the strategic position of many businesses and their business models, resulting in increased requirement for portfolio adjustments. Securing access to sufficient capital, equity and debt is crucial to maintain and strengthen the market position in this environment.
Against this background, it is in the companies’ vital own interest to provide sufficient and relevant information to their shareholders and other users of financial information. Clear and transparent information on the pervasive effects, how management is responding to this major challenge and its consideration and assumptions regarding the uncertainties in the near future are key.
Based on the review provided we have the following key recommendations for the half-year reporting:
- Users will likely expect detailed and quantitative information of the COVID-19 pandemic on the half-year results, and the financial positon, particularly net debt and liquidity.
- A summary describing the major impacts at the beginning of the financial information section helps users to identify and focus on the most relevant aspects.
- Companies should clearly explain their actions to mitigate the potential effects and give as much quantitative information as possible.
- Based on the ESMA guidance, companies should refrain from adjusting existing APMs or introducing new APMs.
- Instead, companies should expand existing disclosures to explain the related impacts.
Due to the high degree of uncertainties, an increased usage of quantitative sensitivity information is recommended. - Clear statements on current year guidance and outlook, the underlying assumptions and scenarios will be appreciated by users. It is better to disclose a broad range and be transparent on the related uncertainties than to provide no outlook at all!
Read our related publication: 2020 update on half-yearly financial reporting
Contact our authors and experts
Oliver Köster
Director, Audit & Assurance
Oliver leads the Complex Accounting Assurance practice in Switzerland, specialised in providing services related to financial reporting. He has over 20 years of experience in IFRS and US GAAP financial reporting and is a specialist for standard implementation and GAAP conversion projects, M&A and IPO transactions as well as investor communications. His background includes auditing and advising large scale listed companies as well as family owned businesses with a particular focus on the pharmaceutical & chemical, media & technology and real estate & leisure sectors. In addition to publishing numerous articles around financial reporting, Oliver also holds lectureships in financial reporting and financial analysis at the University of Applied Science in Worms and at the University of Zurich.
Email
+41 58 279 6123
Samuel Igoe
Assistant Manager, Audit & Assurance
Samuel is an assistant manager in our Corporate Assurance Services department. He holds a master’s degree in civil engineering, is a chartered management accountant and CIMA Prize-winner.
He has 7 years of finance experience within the Investment Management industry, including financial control and group reporting. He possesses a wide range of IT and finance system knowledge.
He has specific experience integrating subsidiary companies into larger corporate groups. Including assisting in the transition from yearly financial reporting to monthly financial reporting, implementing new finance systems and new processes.
Email
+41 58 279 6643
