The Coronavirus pandemic is disrupting life at every level of society – from individual people all the way up through the private sector and government. While the top priority for all organisations should of course be the health and safety of their employees, the virus will undoubtedly disrupt business, and entities must carefully consider the implications when preparing financial reports.
A non-adjusting event
According to TAS 10 – Events After the Reporting Period, an adjusting event is one that “provides evidence of conditions that existed at the end of the reporting period”.
As of 31 December 2019, there were no reported cases of the Coronavirus outside of China. In fact, it was on that very day that Chinese officials first informed the WHO about the mysterious lung illness that caused pneumonia in 41 patients. Our collective understanding of the Coronavirus, along with its effect on business and society, was very limited at that time. For that reason, it is considered to be a ‘non-adjusting event’ on 2019 year-end financial reports.
Most businesses’ balance sheets will remain unaffected by the Coronavirus until the first quarter of 2020. Therefore, accountants must take special care to ensure that their measurements of company assets and liabilities remain unaffected as well. This data includes measurements of hedge effectiveness, credit losses, deferred tax assets, as well as impairment of tangible and intangible assets.
Moreover, as per TAS 2, costs related to reduced or idle capacity due to the Coronavirus cannot be incorporated into inventory costs.
It is possible for events taking place in 2020 to influence accurate reporting on 2019 financial statements. If a significant event occurs in 2019, and then subsequent developments provide clarity regarding the nature or scale of that event, then a financial report covering 2019 should disclose that new information. If the Coronavirus has indeed disrupted business, the 2019 year-end report should include a statement estimating the financial impact, or – if an accurate estimate is not possible to make – a statement that provides a detailed explanation of the relevant circumstances.
Reporting periods that end after 31 December 2019
The economic impact of the Coronavirus will very likely affect financial reports for periods that end in 2020, as these will depend on forecasts. In these uncertain times, accurate forecasts will be much more difficult to ascertain. Cash flow hedge accounting, net realisable value of inventory, impairment of non-current assets and goodwill, deferred tax assets, onerous contract provisions, expected credit losses, as well as significant judgment and estimates disclosures, are all specific areas that could be heavily affected in the wake of the Coronavirus.
Support and guidance are available
The situation surrounding COVID-19 is a delicate and far-reaching one. Although Grant Thornton is taking every precaution to ensure the health, safety, and well-being of our staff in these difficult times, we are still hard at work and ready to provide expert advice to all clients who need help. If your organisation is struggling with any aspect of financial reporting related to the Coronavirus, contact us today.