COVID 19 – The New Normal | Financial Reporting Brief April 2020

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COVID 19 – The New Normal

Financial Reporting Brief April 2020

This month’s article 'COVID-19 – The New Normal' offers some insight into how this great challenge impacts on financial reporting.

COVID 19 – ‘The New Normal'

The quality of financial reporting must be maintained
Our world has never witnessed anything like this on such a global basis – not in our lifetimes. Recent times, even since our last article on March 2nd, has seen change of a scale that is so incredible for all. Our governments, health authorities, and so many others lead the way in educating us and leading us in how to cope with the challenges of what many refer to as the ‘new normal’. At the end of the day, human resilience will meet the challenges and we must have faith that the world will recover and return to what we consider ‘normal’. In acting with the greatest level of resilience, we must all behave with perseverance and live life by the rules.

This article, the latest in our Financial Reporting Brief series, will focus on the challenges to financial reporting and take an overall look at the processes, both judgement and otherwise, which need to be maintained at a level where quality, transparent reporting remains consistently in place for all stakeholders. Preparers, those in charge of governance, auditors and regulators must conduct their activities and perform at a consistently high level, and must not succumb to the difficult challenges around us. This is a fast-moving and evolving situation which will require our close attention to keep up to date.

This article does not purport to address the management, risk and other major challenges of the ‘new normal’. We do draw your attention to the range of insights that Deloitte has published into how to address many of these challenges. Many of these are accessible on our websites to which we provide links at the foot of this article.

ESMA – Market Recommendations
The European Securities and Markets Authority (ESMA), who together with the EU National Competent Authorities, supervise financial reporting in the European Union, are closely monitoring the continuing and escalating impact of COVID-19 on financial markets. In a Public Statement, it has made recommendations to financial market participants in the following areas:

  • Business Continuity Planning – All financial market participants, including infrastructures should be ready to apply their contingency plans, including deployment of business continuity measures, to ensure operational continuity in line with regulatory obligations;
  • Market disclosure – issuers should disclose as soon as possible any relevant significant information concerning the impacts of COVID-19 on their fundamentals, prospects or financial situation in accordance with their transparency obligations under the Market Abuse Regulation; 
  • 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; and 
  • Fund Management – asset managers should continue to apply the requirements on risk management, and react accordingly.

An additional Public Statement has subsequently issued addressed primarily to banks and other financial institutions on the impact of COVID 19 on their assessment of expected credit losses under IFRS 9.

The Supervisory Authorities will continue to monitor the situation. ESMA has expressed intent to use its powers to ensure the orderly functioning of markets, financial stability and investor protection. This is in accordance with the mission of ESMA which is to enhance investor protection and promote stable and orderly financial markets.

Advice and Guidance
The accountancy profession has come out with their advisory comments and guidance in large volumes.

At the European level, Accountancy Europe, a representative body for most European accounting bodies, has published an extensive article for those engaged in accounts preparation and financial reporting and the auditors to those entities.

The UK Financial Reporting Council (FRC) wrote in October to all companies and their auditors on matters that need to be borne in mind in financial reporting. The FRC has published an additional statement on the risks and uncertainties of COVID 19.

Subsequent to that, it has together with the Financial Conduct Authority and the Prudential Regulatory Authority has published a joint statement in response to COVID 19. This provides a summary of the main corporate governance and financial reporting key messages, and also an easement by the FCA of UK Stock Exchange annual report filing requirements. A brief synopsis is included here (QFRB).

Disclosures are required under accounting standards and under company law. Disclosure requirements apply not only to the financial statements, but also to the ‘front end’ of the annual report, primarily in the directors’ report for all companies, with similar requirements for a majority of non-corporate entities.

Listed companies have additional requirements, particularly bearing in mind the report on corporate governance. Additional corporate governance considerations may arise in a wide range of areas, including:

  • Alignment of company purpose, strategy, values and corporate culture – while perhaps these should not change, externally imposed economic and other challenges may pose additional challenges for those charged with governance;
  • Effective engagement with shareholders and other stakeholders – the critical importance of transparent disclosure may become even more fundamental to investors, employees, customers, suppliers and others.

The extent of the risk and the degree to which it may crystallise depends on companies’ specific business circumstances. Companies with business operations, trading relations or supply chains which involve countries most effected are likely to face higher levels of risk. Even where entities are not directly participating, there may still be significant trading links or supply chains involved.

Companies will need to monitor developments and ensure that they are providing up-to-date and meaningful disclosure in their financial reporting. Stakeholders must be properly informed. For listed entities and many public interest entities there may be additional considerations. Investors and other stakeholders need to be in a position to assess an entity’s financial position and performance and understand their sensitivities to changes in assumptions.

Accounting Considerations
Deloitte has recently published IFRS in Focus - Accounting Considerations related to Coronavirus Disease . It provides a valuable summary of the wide-ranging areas where it may be appropriate for entities to consider the impact on accounting measurement and disclosures. It lists seventeen different areas, emphasising that the ultimate recognition of accounting impacts related to these issues will vary depending on each entity’s specific facts and circumstances.

Areas given some additional focus in the publication are:

  • Impairment of non-financial assets, including goodwill;
  • Valuation of inventories;
  • Allowance for expected credit losses;
  • Fair value measurements;
  • Onerous contract provisions;
  • Going concern and liquidity risk management.

The question will also arise for companies of what additional disclosure may be required in relation to events subsequent to the reporting date. With respect to reporting periods ending on or before 31 December 2019, it is generally appropriate to consider that the effects on an entity are the result of events that arose after the reporting date (e.g. decisions made in response to COVID-19) that may require disclosure in the financial statements. Such disclosure should include the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made. There may be cases where the amounts in the financial statements must be adjusted to reflect the impact of COVID-19 where it provides additional evidence of conditions that existed at the balance sheet date. This will apply to the early months of 2020, with the emergence of COVID-19 probably beginning to become apparent from January onwards.

Assumptions and other sources of estimation uncertainty, where there is significant risk of material adjustment to the carrying amount of assets and liabilities, becomes even more challenging in the current environment. There are little or no answers to many questions, and judgement may be reduced to what may be at best an ‘educated’ guess in some respects. It places still more importance on prominent and transparent disclosure of the most complex or subjective judgements that have the most significant effect on amounts recognised.

Pervasive Challenges
Controls over financial reporting including group reporting across territories may be increasingly challenged in these trying times. There may well be other challenges for companies, depending on their circumstances, and which may have an impact on financial reporting. These include:

  • Covenants in loan and other financial arrangements;
  • Derivative and hedging transactions;
  • Insurance claims and recoverables;
  • Vesting conditions under share-based arrangements;
  • Performance targets in business combinations, and other business arrangements;
  • Tax considerations e.g. transfer pricing arrangements, recoverability of deferred tax assets

These are just a few considerations but demonstrate that there is a wide range of potential areas which may lead to an impact to the financial statements.

Conclusion

The impact of COVID-19 will continue, with nobody knowing for how long. Our economic environment and financial and other markets will face significant challenges and risks.

The impact on entities will differ and entities, and their auditors, have to consider how it affects their business and monitor the situation on a continuous basis.
Entities will continue to need to provide consistent and meaningful disclosures to their stakeholders when preparing their financial reports. Required disclosures will likely change over time as more information emerges.

In the midst of all, we must retain our belief that this too shall pass.

Please visit our website for more information on responding to Covid-19

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