Covid-19 – The Epic Battle Continues
Financial Reporting Brief May 2020
This month’s article ‘Covid-19 – The Epic Battle Continues’ continues to look at the accounting considerations that have been magnified by Covid-19, developments in accounting guidance and the information and insights available on Deloitte websites.
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Covid-19 continues to cast its large shadow over all and we find ourselves grappling with difficulties of great magnitude with regard to healthcare, our economy and throughout our workplace and social communities. The challenges are great but so too is our resilience.
The importance of financial reporting runs the potential risk of being down-played during these troubled times but we must continue the flow of transparent, quality information to investors and other stakeholders. No ‘softening’ has arisen with regard to the exacting financial reporting frameworks within which entities must report. Substantial guidance has issued to support entities with the reporting process, from both the International Accounting Standards Board (IASB) and the Financial Reporting Council (FRC), amongst others. The Accountancy Bodies, including the Institutes of Chartered Accountants in both Ireland and in England and Wales have played a key role in making information available to their members.
Guidance has continued to issue during April, and we refer to this in this article, as well as bringing your attention to a number of Deloitte publications and similar communications that provide additional insight and observations. We comment a little more on some of the areas that have become of greater concern in these troubled times. The situation continues to evolve and it behoves us all to keep a watchful eye on developments and on further guidance.
Judgements and Estimates
It is widely recognised that high quality financial reporting requires the application of professional judgement to an entity’s particular circumstances. This requires skills, experience and internal controls. In these troubled times, the challenges to those capabilities are greatly exacerbated with entities being called on to consider and evaluate macro-economic and related factors of a magnitude they have never experienced before. Best efforts are needed to weigh up alternative scenarios as they apply to the particular circumstances of each individual entity to arrive at conclusions that make sense and are capable of being supported. Conditions that arise from Covid-19 may, for those companies with reporting dates in December/January, require detailed consideration of whether they require adjustment to measurements at year end or disclosure, as non-adjusting events. Our April article commented on this and guidance is available in the Deloitte publications linked below.
Hand-in-hand with the judgements made is the need to rigorously estimate the measurement of potential outcomes, particularly as they may impact on the carrying value of assets and liabilities in the foreseeable future. The basis of and assumptions used in the estimation process must give attention to the probability of different outcomes, potentially wide-ranging, and evaluate them to arrive at measurements which may be considered reasonable in the circumstances.
The use of forecast information is pervasive in an entity’s assessment of, amongst other things, the impairment of non financial assets, expected credit losses, the recoverability of deferred tax assets and the entity’s ability to continue as a going concern.
There is a range of key principles to bear in mind, which include inter alia:
- Estimated cash flows and discount rates should be free from both bias and factors unrelated to the asset in question;
- Estimated cash flows should reflect a range of possible outcomes, rather than a single expected outcome;
- Cash flow projections should reflect the conditions in existence at the reporting date and be based on the most recent financial budgets/forecasts, generally covering a maximum period of five years, although, in these uncertain times, reliable detailed budgets are most likely to be capable of being prepared for much shorter periods.
Care is needed with regard to the consistency of the data being prepared and compared to avoid double counting or omission of some data, including those pertaining to discount rates and risk factors.
Given the high level of uncertainty currently inherent in judgements and estimation processes, the importance of detailed disclosure cannot be overstated. Investors and other stakeholders must be informed of those judgements and estimates in a comprehensive manner. They must be enabled to understand that, despite best efforts by entities, there remains a level of volatility in financial reporting at a far higher level than generally applies in ‘normal’ times.
Deloitte has published a further edition of IFRS in Focus – Accounting Considerations relating to the CoronaVirus 2019 Disease – it discusses certain key accounting considerations, the significance of which may vary from industry to industry and by entity, but are likely to be the most pervasive and difficult to address.
Deloitte has also launched a series of webcasts on accounting considerations, with the first three dealing with judgements and estimates, events after the reporting date and impairment of assets.
Expected Credit Losses
Business failures or deteriorating operations and performance, liquidity difficulties and the overall ability of an entity to continue as a going concern raise questions of much greater magnitude in these troubled and uncertain times.
The estimation of expected credit losses (ECL) has become a significantly greater challenge, not only for banks and financial institutions, but for all entities that extend credit. This is a prime example of applying the judgement, estimation and disclosure process commented on in the previous section of this article.
IFRS 9 does not set bright lines for measurement of ECL. Entities are required to develop estimates based on the best available information and evidence about past events, current conditions and forecasts of economic conditions. Consideration should be given to the effects of both Covid-19, and the significant government support measures being undertaken.
The IASB has published a document intended to support the consistent application of standards to accounting for ECL in the light of current uncertainty. The European Securities and Markets Authority (ESMA) has also published guidance, with a particular focus on how government support measures are taken into account in the ECL estimation process.
IASB – IFRS 16: Leases and Other Announcements
The IASB has published an exposure draft 'Covid-19-Related Rent Concessions (Proposed amendment to IFRS 16)' which proposes that lessees will be provided with an exemption from assessing whether a Covid-19-related rent concession is a lease modification. Therefore, practical relief will be provided to lessees to avoid the requirement to address the question of whether there is a lease modification, and therefore lease accounting by entities would not need to change. The IASB expects to have work completed by the end of May, with an implementation date of 1st June 2020.
Deloitte has published IFRS in Focus — IASB proposes to amend IFRS 16 'Leases' regarding Covid-19-related rent concessions.
The IASB has also announced some deferrals of implementation and consultation dates with the Amendments to IAS 1 on Classification of Assets and Liabilities deferred for mandatory implementation until 2023, and the consultation period has been extended for a further three months on the IASB projects on General Presentation and Disclosure, and Business Combinations – Disclosures: Goodwill and Impairment.
Alternative Performance Measures
In 2016, ESMA published Guidelines regarding Alternative Performance Measures (APMs) and has since published a number of Q&As addressing clarification of various aspects of the Guidelines. The most recent Q&A concerns the impact of Covid-19 on APMs.
ESMA reminds entities that the definition and calculation of an APM should be consistent over time. Rather than adjusting the basis of existing APMs, or including new APMs, ESMA urges entities to improve their disclosures and include narrative information in their financial reports. This should explain how Covid-19 has impacted or is expected to impact operations and performance, including how it has affected the basis of calculation of the APM and assumptions used.
There is no real clarity as to the potential duration and extremity of Covid-19. The pandemic presents conditions of a general economic downturn, including financial market volatility and erosion, liquidity concerns, increasing unemployment and further government intervention.
In the face of these great uncertainties, we must strongly uphold the values of quality financial reporting and remain loyal and committed to investors and stakeholders in communicating meaningful information to them.
Monthly Reporting Pack - April 2020
Irish/UK GAAP & Related Developments
- ICAEW publishes guide to IFRS 9 and Covid-19
- CAI - Governance in a Crisis: Responding to Covid-19
- CAI - Going Concern considerations for members preparing or auditing financial statements in the context of Covid-19
- FRC calls for members for a Technical Advisory Group on IFRS 17
IFRS & Related Developments
- IASB publishes proposed amendment to IFRS 16 regarding Covid-19-related rent concessions
- IASB holds meeting dedicated to Covid-19 issues
- IOSCO statement on the application of accounting standards during the Covid-19 outbreak
- ESMA expands Q&A document on the implementation of its APM guidance – for Covid-19
- IPSASB publishes Covid-19 guidance
- IASB publishes proposed amendments as a result of the second phase of its project on the IBOR reform
- EC launches consultation on renewed sustainable finance strategy
- IOSCO sees role for itself in sustainable finance
- IASB releases podcast on IFRS 17 (April 2020)
Legal & Regulatory Developments
- ESMA publishes 24th enforcement decisions report
- ESMA publishes report on the activities of accounting enforcers and their findings within the EU in 2019
- IFRS in Focus — IASB proposes to amend IFRS 16 'Leases' regarding Covid-19-related rent concessions
- IFRS in Focus — Accounting considerations related to the Coronavirus 2019 Disease
- Podcasts on Covid-19 related accounting considerations
- IFRS in Focus — IASB proposes Interest Rate Benchmark Reform — Phase 2: Proposed amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS
- IFRS on Point
Previous Financial Reporting Briefs
- Quarterly Financial Reporting Brief: April 2020
- April 2020 - Covid-19 - The New Normal
- March 2020 - Sustainable activities - A need for Transparent Reporting
- February 2020: Corporate reporting - delivering the message
- Quarterly Financial Reporting Brief: January 2020
- January 2020: ESG Risks - The reporting challenge
- December 2019: Financial Reporting – Promote Public Confidence and Trust
- November 2019: Regulatory Environment - Lessons for All
- Quarterly Financial Reporting Brief: October 2019
- October 2019: Taxation - A Financial Reporting Challange
- September 2019: Corporate Reporting – A Continuing Challenge
- August 2019: Climate Change – Planet Earth does not have time for excuses!
- Quarterly Financial Reporting Brief: July 2019
- July 2019: Integrated Reporting – Corporate Strategy and Long-Term Value
- June 2019: Lease accounting - IFRS 16: A new age
- May 2019: Corporate Balance Sheets – The Full Picture?
- April 2019: Sustainable Development – A Goal for All
- Quarterly Financial Reporting Brief: April 2019
- March 2019: Reporting on Success - Getting the Balance Right?