The Effects of COVID-19 on Impairments, Financial Instruments, and Events
Across the world, the impact of the virus has finally started to affect financial statements. In this Blog, we will discuss these effects and talk about adjusting impairments, events, and financial statements.
COVID-19 has severely damaged the economy and markets around the world. As a result, all industries are now facing difficulties. Since the movements of people have been restricted, transport, leisure, entertainment, and retail industries have had a huge impact; however, the damage on financial statements is such that it will spread towards a lot of industries.
Due to the decrease in revenue, the estimates made by companies will have drastic changes to them, moreover; many issues like contracts to provisions will arise. Some large scale accounting organizations have developed the best resources that summarize and explain the main points of an accounting standard. Through these guidelines, any company can learn how to cope well during the pandemic.
The pandemic will probably lead many businesses to the point that they will need to assess applications of a bigger IFRS Standard. Since we cannot cover all these, let’s discuss two major items that should be considered by all businesses.
Events After the Reporting Period
Entities struggling due to the current situation should follow the requirements of IAS 10, Events After the Reporting Period. There are 2 categories covered under IAS 10;
Adjusting events; this is an event that provides information about a certain condition that occurs during the reporting period. These events can cause changes to the financial statements.
Non Adjusting events; these events are suggestive of conditions that occur at the end of the year. This can result in the disclosure of statements but might not affect the amounts.
The impact of the application for COVID-19 depends on when a company has their year-end. China alerted WHO, World Health Organization about a new virus by the 31st of December, 2019. So, therefore, the entities with reporting periods ending before, or on 31st December will treat the progress as a non-adjusting event. The disclosures will hold importance, although the figure in the financial statements might not change.
Moreover, we can assume that reporting events ending after 31st January 2020 are part of the adjusting period.
There is a risk of impairment, as the price of a company is based on its projected cash flows. Every year, when the Goodwill impairment test is conducted for companies applying for IFRS Standards, they are required to compare the recoverable amount with the carrying amount. An important component of this is to estimate the current value of the cash flow. Goodwill and impairment are one of the projects that stays on the work plan of IASB; International Accounting Standards Board. Currently, this project cannot be undone, as the current situation might have a long term effect on asset values.
A very common issue faced by entities is coming across potential impairment from receiving assets. This can happen in a few different ways;
- The commitment under loan relationships can be affected due to COVID-19, hence, affecting the ability of borrowers.
- Governments might ask businesses to give paid holidays to employees; this can lead to credit loss.
- Reduced interest rates or fees on loans given out, meaning a lower amount is recovered from the loans.
IASB has issued guidelines due to this problem. Instruments that come under these guidelines include; trade, contract leases, loans, financial guarantees, and other receivables. Under IFRS 9, a company needs to consider; the impact COVID-19 on ECLs allowance and the rise in credit risk. The use of judgment is crucial while following these guidelines.