The COVID-19 outbreak and the measures taken to mitigate its impact are having a significant effect on economic activity. This in turn has implications for financial reporting. These include:
The financial reporting implications apply across IFRS and UK and Ireland GAAP (FRS 101 and FRS 102). There are a number of key considerations for Irish companies dealing with the impact of COVID-19 on their financial reporting:
Projections and forecasts of future cash flows are a key component of financial planning. They are often used in models to support assessments of the recoverability of certain assets, as well as the viability of businesses as going concerns. Assumptions underpinning these cash flows projections should be critically assessed to incorporate the impact of COVID-19. This may include the expected impact arising from restrictions on operations, supply chain disruption and customer demand.
While asset impairment assessments should reflect conditions existing at the balance sheet date, going concern assessments must include the impact of events and conditions arising up to the date of signing the financial statements. This means that the financial impact of the pandemic containment measures that have evolved globally in Q1 2020 would be considered a non adjusting event for asset impairment assessments for 31 December reporters but the impact of these measures would need to be considered for going concern assessments for the same 31 December reporters. Therefore, given the increased uncertainty around the extent and duration of the current crisis, companies will need to consider a range of possible downside scenarios and continually monitor and revise such projections to support its going concern assessment up to the date of signing the financial statements.
The extent to which the ongoing pandemic will impact on asset impairment assessment (for reporters with year or periods ending subsequent to 31 December) and for going concern assessments will depend on entity specific circumstances, including existing financial health and the degree to which the business is exposed to operational and financial risks associated with the pandemic containment efforts.
Linked to the re-examination of projections and forecasts, companies should consider whether the impact of COVID-19 is an "impairment trigger" which, under IFRS or UK and Ireland GAAP, would require a full impairment assessment to be performed. Given the impact of COVID-19 on many industries and sectors, it is highly likely that the virus and the response taken by authorities is an impairment indicator. A cessation of operations (even temporary), a decrease in the value of a publicly traded company's share price to below book value and an immediate decline in demand for a company's output, are all indicators of impairment that would require an impairment assessment to be performed. This will be particularly relevant for reporters with a year or period ending subsequent to 31 December 2019.
Management should consider the profile of its asset base and the extent to which the ongoing pandemic is expected to impact on their recoverable amounts. The most common assets categories that will need to be assessed include intangible assets (including goodwill), property, plant and equipment, inventory, investments in subsidiaries carried at cost less impairment and investments in associates and joint ventures accounted for under the equity method.
It is important to assess the extent of financial difficulties faced by your customers and the impact on the timing of revenue recognition, expected credit losses on receivables and the net realisable value of inventory.
The current disruption to businesses and reduced customer demand will likely lead to an increase in expected returns, additional price concessions, changes in volume discounts, penalties for late delivery or a reduction in sales pricing. Any of these could affect the measurement of variable consideration as well as reducing the net realisable value of inventory.
One of the criteria for having a contract with a customer under IFRS 15 is that it is probable that the company will collect the promised consideration when it is due. Clearly the ability of customers to pay consideration as it falls due in the current economic environment is significantly hampered by business interruptions and reduced cash flows which in turn will have implications for the timing of revenue recognition as well as likely increasing expected credit losses pertaining to financial assets, including trade receivables and intercompany loans.
To stem the financial implications arising from the COVID-19 business disruptions, many companies will seek to renegotiate contractual terms with suppliers and financial institutions as well as taking measures to reduce its cost base and take advantage of government support available for companies impacted by the pandemic. Companies should carefully consider the financial reporting implications of these remediation measures including:
Irrespective of the impact on reported assets and liabilities, the impact of COVID-19 will require additional disclosures in financial statements. As a matter of course, companies are required to disclose the significant judgements applied in preparing the financial statements, including any judgements regarding going concern. The impact of COVID-19 may result in the application of new policies or increase the degree of significant judgements and critical estimates used in those financial statements, all of which require disclosure. The Irish Companies Act requires Irish companies (other than small companies) to include in their Directors' report a description of their principal risks and uncertainties - the extent of the risks relating to COVID-19 and the degree to which they might crystallise will depend on companies' specific business circumstances, and might change over time as more information emerges.
Remember, disclosure considerations continue up until the date the financial statements are approved and signed. Auditors are required to consider the implications of post-balance sheet events and management's response to them as part of their audit.
Whatever your organisation needs to deliver its financial reporting obligations, we are here to support you as you look to succeed through uncertainty.
Partner, PwC Ireland (Republic of)
Tel: +353 1 792 8304
Director, PwC Ireland (Republic of)
Tel: +353 1 792 8008