THE IMPACT OF CORONAVIRUS WILLSPREAD TO FINANCIAL REPORTING

1. Going concern

1.1. Accounting standards require that financial statements be prepared on a going concern basis. The going concern assessment takes into account past events. Entities ending December 31, 2019 and the reporting period thereafter should consider whether coronavirus-related events that occurred after the balance date caused a significant deterioration in their operating results or financial condition, or introduced material uncertainties.

2. Impairment of non-financial assets

2.1. Non-financial assets must be tested for impairment at the end of each reporting period, provided it is an indicator of impairment. Intangible assets with indefinite useful lives and goodwill are exceptions to this rule and must be tested for impairment at least once a year. When the recoverable amount of the asset is less than the book value, an impairment should be recognized in income.

3. Trade receivables and expected credit losses (ECL)

3.1. The extent and severity of non-compliance that entities may be exposed to will depend on factors such as industry and geographic location. Forecasts for future economic growth can be revised downwards, increasing the probability of default by debtors. General reductions in asset prices can mean a decrease in collateral values, increasing losses given default rates.

3.1.1. This introduces significant uncertainty, and thus challenges, for preparers of financial statements. Entities will have to undertake a careful diagnosis to understand how COVID-19 affects their financial reporting to ensure all material effects of the outbreak are accounted for and disclosed in their financial reports.

4. Borrowing covenants

4.1. With COVID-19 putting a strain on trading conditions, there is increased risk that entities will breach borrowing covenants. For example, should an entity breach a specific loan covenant prior to reporting date that allows the lender to call on the loan at any time , such a loan would have to be classified as current. Such post-balance date breaches would also have to be factored into the going concern assessment.

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5. Revenue recognition

5.1. Revenue is the top line in an entity’s statement of financial performance and is often a critical number for investors, analysts and other stakeholders. Contracts with Customers, revenue cannot be recognised until collection of the consideration to which the entity is entitled is probable.

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