Tuesday 5 May 2020
Bill Gates said in his 2015-TED talk “If anything kills over 10 million people in the next few decades it’s likely to be a highly-infectious virus rather than war. Not missiles, but microbes.”
We have seen the adverse consequence of global lockdown on many industries including travel, transportation, manufacturing, real estate, automobiles, retail, energy and banking.
- Virgin Australia, the country’s second biggest aviation company went into voluntary administration after failing to secure a £710 million bailout
- West Texas Intermediate (WTI) oil futures contracts close to expiry were trading at almost negative $40 in April as there were no willing buyers
- Nearly half of UK companies had scrapped dividends by mid-April
In order to fight the economic impact of this unprecedented situation, the UK and many other countries have announced stimulus packages that have exceeded those offered in the global financial crisis of 2008. This quote is apt for any business today:
“Revenue is vanity, Profit is sanity and Cash is king”
Will the financial statements for the period ended 31 December 2019 be adjusted for the impact of COVID-19?
IAS 10 Events After the Reporting Period defines adjusting events as those that existed at the end of the reporting period. Since the impact of the virus appears to have mostly spread in 2020, it will be a non-adjusting event for the period ended 31 December 2019.
For companies with 31 December 2019 year-end, the nature of the event and an estimate of the financial effect must be disclosed, if material. If it is not possible to estimate this, a statement to that effect is required.
Impact of COVID-19 on IFRS financial statements for 2020
In addition to understanding the impact on top line (revenue) and bottom line (net income), the significant areas that preparers, investors and analysts should closely review include:
- going concern assessment
- customer receivables, including expected credit losses (click here for IASB guidance)
- inventory obsolescence
- impairment of assets including goodwill
- rent concessions (click here for IASB guidance)
- abnormal costs, including paid staff leave
- impact of the government’s emergency assistance
- insurance recoveries
- liquidity, including the ability to service debt
- impact on future dividends and share buy-backs
- management disclosures on the commercial impact, future risks and uncertainties
The COVID-19 environment has led to a significant increase in use of judgements and estimates in the above areas. There will be additional qualitative disclosures in the financial statements. The auditors have revised the risk assessment of their clients.
From a commercial perspective, many customer and supplier contracts may need to be renegotiated. This will have a significant impact on the forecasts of profitability and cash flows. Some of the other considerations in preparation of revised budgets and forecasts are:
- deferral of capital expenditure
- restructuring of operations to reduce costs
- use of undrawn borrowing facilities to meet short-term needs
- restructuring of long-term loans and other borrowings
How many weeks or months of unavoidable cash outflows can be met with the current cash and cash equivalents balance, access to undrawn facilities and government assistance?
The impact of COVID-19 will be a key discussion point in the coming quarters in CEO/CFO updates and investor calls.
Lastly, as most of us work and interact remotely in the near future, it is important that the quality of financial statements, their audit and financial analysis is not compromised.
Stay safe. Stay positive.
About the Author:
Saket Modi is an IASeminars instructor on IFRS and IPSAS based in London. He has designed and facilitated courses on IFRS, in particular financial instruments, for delegates from over 50 countries in UK, Europe, Africa, Middle East and Asia. He is a qualified accountant and CFA® charterholder.