Accounting Implications of COVID-19

Most entities worldwide have been impacted by COVID19 to an extent or other, irrespective of the industry in which they trade in. Some entities have been effected directly given that their business was disrupted mostly due to restrictions and lockdowns im

Consequently, whilst preparing the financial statements, in order to ensure that these show a true and fair view, such impact on the business’ operations needs to be duly reflected in accordance to the relevant accounting standards.

Events after the reporting date

An “event after reporting date” is defined as being an event which occurred after the balance sheet date, but before the authorisation of the relevant financial statements in both ‘ IAS 10 – Events after the Reporting Period’ and GAPSME. A distinction is then made between adjusting and nonadjusting events.

An adjusting event is deemed to have arisen prior to year-end and thus the necessary adjustments would need to be reflected in the financial statements. In the case of events which arise after year end, whilst it is not required for the relevant adjustments to be reflected in the financial statements, the standards require for these be disclosed if material in nature. Such disclosure should include an estimate of the financial effect of such event on the financial statements, and where this is not possible informing such.

The first cases of Covid- 19 broke out in December 2019 and on 11th March 2020 the World Health Organisation characterised the outbreak as a pandemic. Therefore, with respect to financial statements as at 31st December 2019, since at that point in time there was no evidence of the rapid spread of the virus in the subsequent months, this would be deemed as a non-adjusting event.

Going Concern

a statement

In accordance with both ‘IAS 1 – Presentation of Financial Statements’ and GAPSME, management is required to assess the entity’s going concern for at least up to twelve months after year end when preparing the financial statements.

Careful consideration would need to be made in this respect particularly in the case of those entities operating in sectors which have been severely effected by the spread of the pandemic, including hospitality, entertainment, restaurants, aviation as well as retail.

In the eventuality that management has material concerns on the entity’s ability to retain operations as present, a disclosure outlining such would need to be included in the financial statements. On the other hand if management is aware that the company shall cease trading, either because a voluntary decision has been taken in this respect or because it doesn’t have another option, then the financial statements are not to be prepared as a going concern, but rather on a break-up basis.

Other Considerations

In light of the unfolding events, apart from going concern, entities would also need to properly analyse those assets and liabilities which require a level of judgement and estimation. This would be especially the case for those entities which are preparing financial statements with year ends from the first months 2020 and onwards when the scale and impact of the virus had become more apparent.

This would include, but is not limited to:

• Assets carried at Fair Value – in determining the valuation one would also need to take in consideration the effect of the pandemic on the market and inevitably the potential buyers

• Impairment evaluation – assets may need to be tested for impairment, based on updated estimated future cash flows and relevant assumptions made

• Contracts: changes and terminations – these may arise due to difficulties experienced by entities the business trades with, being lack of cashflow, business discontinuity amongst others

Finally, in the case of those entities which availed themselves of government grants, one would need to identify the proper manner to account for such. These would mainly fall under ‘ IAS 12 – Income Taxes’ and ‘ IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance’ depending on the type of grant.

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