What is the Impact of the COVID-19 Crisis on the Evaluation of a Company’s Accounting and Financial Statements?

The main purpose of financial statements is to provide relevant financial information to all users including existing and potential investors, lenders and other creditors. We trust that this information represents a “true and fair” view of the company’s financial position and cash flows.

The fast spread of COVID-19 is affecting a lot of businesses, resulting in the need for entities to make appropriate adjustments and disclosures to reflect all the uncertainties amidst this pandemic.

Below are some key highlights of the Impact of COVID-19:

Events after the reporting period

FRS102 governs the recognition and disclosure requirements for events occurring after the reporting date.

The question which arises is, to what extent do the effects of the virus impact the accounts with regard to adjusting or non-adjusting events.

Adjusting events provide evidence of conditions that existed at the end of the reporting date. Non-adjusting events indicate the circumstances did not exist at the end of the reporting period.

Amounts recognized in the financial statements are amended for adjusting events.

It is important to take note of the accounting period end date. The outbreak was declared in 2020 by the World Health Organisation. It does not provide evidence of a condition that existed at 31.12.2019, hence no adjustment should be made to the amounts in the financial statements for entities with a 31 December 2019 reporting date as it is a non-adjusting event. However, from 1 January 2019 it may be an adjusting event when it comes to quarterly or half yearly reporting for 2020.

Hence for entities with a 31 March 2020 reporting date, the expected impact of COVID‑19 should be reflected in the accounts.

Going Concern and Material Uncertainties

Entities need to consider whether they have the ability to continue as a going concern.

As many users rely on the information on financial statements, it is very important for management to make an assessment of any uncertainties related to events or conditions that may affect the entity’s ability to continue as a going concern. In these cases, appropriate judgements, assumptions and estimates need to be carefully applied during this uncertain time. They will have to consider all the available information and ensure that applicable disclosures of any uncertainties are made in the accounts.

For examples:

• Lockdown
• Financial health of key suppliers and customers
• Entity’s own financial resources and financial obligations
• Government assistance

Preparation of Cash Flows

During this time of uncertainty, it is useful for small business to manage cash and liquidity positions.

It is an indication of how much cash the business generates, calculated as income less expenses including tax on profits. It also indicates how much dividends can be paid to the shareholders and how much should be left in the business for further investment.

Again, any assumptions and uncertainties need to be made when preparing the cash flow, for example, there might be a reduction in revenue for a short term.

During this difficult time, to improve the liquidity position, businesses may:

• Chase debtors harder
• Have proper negotiations with suppliers to discuss better terms of payments and any potential discounts
• Take advantage of all the Government assistance

Fair Value Measurements (FVM)

Companies are required to measure some of their assets at fair value, the price that would be received to sell the assets. Possible areas where FVM may be an issue:

• Investment properties
• Property, plant and equipment

The information available to the market at the reporting date may be relevant in making this evaluation.

Disclosures may be needed to enable users to understand whether or not the outbreak has been considered for the purpose of FVM.

Expected Credit Loss

The virus outbreak has led to business disruptions which in turn have affected:

• Liquidity issues of certain entities
• Request for extension of credit periods
• Bad debts
• Debtors receivable
• Loans receivable

This might give rise to increased credit risk and the possibility of default on credit repayments.

Government Funding

The government has launched some support measures which businesses can take advantage of. These include:

Coronavirus Job Retention Scheme

Coronavirus Business Interruption Loan Schemes

Future Funding

Deferral of VAT - Vat payments due from businesses between 20 March 2020 and the end of June 2020 have been deferred.

Note: This list is not exhaustive, further help can be found if you click here

This article has highlighted some of the possible effects which businesses are likely to face during this pandemic. It is important to evaluate the consequences and follow the appropriate measures above to minimize disruption and ensure that the company accounts show a ‘true and fair’ view.