Financial statements and COVID-19: Are you prepared?

Financial reporting periods ending during 2020 will require additional effort to adjust for and disclose the impact of COVID-19 on the financial statements. What are the main challenges and key points to consider?

The Coronavirus (Covid-19) pandemic presents a challenge, unprecedented in modern times, for businesses both locally and internationally. Although its effects are uneven across the economy, many sectors have been severely affected and none have been left untouched. In the face of this challenge, users of financial statements want to understand not only how the historical financial performance has been impacted, but also what it means for a company's future prospects. This means that preparers of financial statements will have to dedicate additional effort to ensure that the financial statements meet the users’ and the auditors’ expectations relating to the impact of COVID-19 on the business.

Key impacted areas: Are you prepared for COVID-19?

The UK’s Financial Reporting Council (FRC) issues periodic thematic reviews of publicly available financial statements of selected listed entities in the UK. The last thematic review which was issued in July 2020, reviewed financial statements containing periods that occurred during the COVID-19 pandemic. As expected, the FRC focused its review on the effects of COVID-19 on financial reporting. The purpose of these reviews is to provide useful guidance for companies preparing their annual and interim financial statements by identifying areas where disclosures affected by COVID-19 can be improved, whilst also illustrating examples of good practice from selected entities that demonstrate the level of detail that is expected to be provided. Overall, these reviews provide constructive criticism to listed entities that simultaneously guides and encourages preparers of financial statements to strive towards quality and best practice.

We have summarised the key areas that were affected by COVID-19 as outlined in the table below. We focused on the areas that will require the most significant increase in disclosures, supporting workings and overall effort by the preparers of financial statements. These areas include the following:


Accounting topic

COVID-19 impact

Going concern

Detailed subsequent event analysis and disclosure is required due to COVID-19-related events. Disclosures are expected to evaluate and explain a range of possible scenarios.

Significant judgements and estimates

Companies are likely to have to make, and disclose, more significant judgements and estimates. Companies will also be expected to perform and disclose a sensitivity analysis for key accounting estimates, clearly explaining what sensitivity ranges were chosen, and why. The underlying assumptions that were made also need to be disclosed and justified.

Cash, liquidity and covenant compliance

Companies are expected to disclose their access to cash and sources of finance (including undrawn facilities) and explain the company’s debt covenants, including the available headroom and whether any covenants are expected to be breached after the financial year-end.

Expected credit loss (ECL) provisioning

Companies are expected to update their ECL estimation models in response to the reality of COVID-19, including due consideration to forward-looking information as required by IFRS 9 Financial Instruments. Collectively assessed debtors may need to be disaggregated into multiple segments, given that different industries were affected differently by the pandemic.

Impairment of non-financial assets

Entities will need to assess whether the impact of COVID-19 has potentially led to an asset impairment, in which case the asset would need to be tested for impairment (i.e. through calculations and estimates).

Careful consideration of the cash flow projections, growth rate(s) and discount rate(s) will be critical in terms of the supportability and reasonableness of the calculations given the current market conditions under COVID-19.

Fair value measurements

The assumptions on which the fair value calculations that were performed in prior years were based, are unlikely to be valid during the pandemic. Thus companies would need to adjust the existing valuations or perform new ones based on an updated set of assumptions.

Government grants

Companies need to disclose the government grants and assistance that the company benefitted from during the financial period covered by the financial statements and how it has been accounted for.

Lease concessions

Rent-free periods, rent reductions, deferrals of rental payments and renegotiations of lease agreements need to be assessed and the financial statements updated accordingly, with adequate disclosure.

Adjusting vs. non-adjusting events

As the COVID-19 pandemic is made up of a series of events, consideration will need to be given to which of these events are adjusting and how these adjusting events should be recorded in the financial statements. This is likely to require continual assessment of the changing circumstances that the company faces.

Deferred tax assets

Companies are expected to review the current impact of COVID-19 on future taxable profits, against which deferred tax assets can be recovered. Assumptions used should be consistent with those in the going concern note and impairment assessments.


Are you prepared?

Inevitably, all of the above, together with the added operational pressure caused by COVID-19, will significantly increase the time and human effort required to prepare true and fair financial statements that meet users’ expectations.
The key questions to assess whether your company is ready to prepare financial statements impacted by COVID-19 are as follows:

  1. Do you have sufficient human resources with the required skills to develop financial projections under multiple scenarios and adequately disclose the results and conclusions in the financial statements?
  2. Do you have going concern assessments in place that can be readily updated in response to rapidly changing circumstances?
  3. Do you have liquidity management plans that the company can take to maintain adequate liquidity during the pandemic?
  4. Did you plan on how existing expected credit loss models will be revised to consider the new reality caused by the pandemic, any required profiling of debtors and to consider forward-looking information at the balance sheet date?
  5. Considering that COVID-19 is widely treated as a trigger of impairment, do you plan to perform an impairment assessment for non-financial assets such as investment property, intangible assets (including those that are assessed for impairment annually) and right-of-use assets?
  6. Are you planning on how to prepare/update calculations and internal models to support different scenarios, sensitivity analyses, expected credit losses and impairment conclusions that are recognised and/or disclosed in the financial statements?
  7. Were pre-COVID-19, financial reporting deadlines already difficult to achieve? If yes, careful planning for all of the above, including seeking professional assistance where required, is critical to avoid missing deadlines.

How can we help?

The Deloitte Malta Assurance team can work with you to overcome any of the challenges you may be facing in these areas and leading you to issue financial statements that meet users’ increased expectations around COVID-19. Some of the services we already provide are: review of financial statements to identify areas for improvement, drafting of disclosures for management’s consideration, review and improvement of client’s internal models for modelling scenarios, valuations, sensitivity analyses, expected credit losses and impairment. We also prepare easily manipulated Excel-based accounting solutions tailored to specific business needs.

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