IFRS in Focus: Accounting considerations related to COVID-19

The coronavirus 2019 (COVID-19) pandemic is affecting economic and financial markets with entities experiencing conditions often associated with a general economic downturn.

This includes, but is not limited to, financial market volatility and erosion, deteriorating credit, liquidity concerns, further increases in government intervention, increasing unemployment, broad declines in consumer discretionary spending, increasing inventory levels, reductions in production because of decreased demand, layoffs and other restructuring activities. The continuation of these circumstances could result in an even broader economic downturn, which could have a prolonged negative impact on an entity’s financial results.

IFRS in Focus is a series of Deloitte publications on trending topics in the accountancy profession. In this article, we have highlighted the key issues discussed in the latest IFRS in Focus publication, released on 29th October 2020 and appended further below. The full publication is also available online at: https://www.iasplus.com/en/publications/global/ifrs-in-focus/2020/coronavirus
 

Some of the key issues, difficulties and changes brought about by COVID-19 include:

Going concern disclosure

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. Even if an entity concludes that there is no material uncertainty regarding its ability to continue as a going concern, there may still be information which may be relevant to users of the financial statements, such as:

• the different going concern scenarios that have been considered;
• inputs that have been subject to stress tests and an explanation of how these stress tests have affected the going concern conclusions;
• any mitigating actions management is able to take to improve liquidity;
• any post balance sheet changes to liquidity, specifically the arrangement of new lending facilities, the extension of existing facilities or the renegotiation of debt instruments or facilities or waiving of loan covenants;
• the level of drawn and undrawn finance facilities in place;
• the covenants in place and whether they are expected to be breached; and
• the need for structural changes in order for the entity to continue to operate as a going concern.

Liquidity risk management disclosure

Entities should consider providing sufficiently detailed quantitative and qualitative disclosures about, for example, their access to cash and sources of finance and any changes or likely changes to the existing financing arrangements. Also, if relevant, entities should explain the impact of government assistance programmes as part of their liquidity risk management.

Dividends and capital management disclosure

Disclosures of changes made to capital management in response to COVID-19 will be relevant for many entities. Where the distribution of dividends has been suspended, it is helpful to indicate when the period of suspension is expected to end or the decision revised.

Clarification on the timing of recognition of government grants

Government grants are recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expenses the related costs for which the grants are intended to compensate. Care is needed in identifying which of the conditions give rise to costs and expenses, since those are the conditions that determine the period over which the grant is recognised in profit or loss.

A grant related to income (e.g. reimbursement of employment costs) is recognised as part of profit or loss either, as an accounting policy choice to be applied consistently to all similar grants:

• Separately or under a general heading such as ‘other income’; or
• As a deduction in reporting the related expense.

A grant related to the acquisition of an asset is recognised in the statement of financial position in one of the following two accounting policy choices to be applied consistently to all similar grants:

• Recognising the grant as deferred income, which is then released as income in profit or loss on a systematic basis over the useful life of the asset; or
• Deducting the grant in calculating the carrying amount of the asset, in which case the grant is recognised in profit or loss over the life of a depreciable asset by way of a reduced depreciation expense.

Other areas in the financial statements that are expected to be affected by COVID-19 include:

• Significant judgements and estimates
• Expected credit loss provisioning
• Impairment of non-financial assets
• Fair value measurements
• Lease concessions and modifications
• Cash, liquidity and covenant compliance
• Adjusting versus non-adjusting events after the reporting period
   

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. Have you identified the internal resources with appropriate expertise in order to consider the impacts as highlighted above?
2. Have you planned how to prepare/update any calculations and internal models to support all scenarios, sensitivity analyses, expected credit losses and impairment conclusions that are recognised and/or disclosed in the financial statements?
3. Considering that pre-COVID-19 financial reporting deadlines may have been already difficult to achieve, careful planning for all of the above 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.