COVID-19 financial reporting considerations
COVID-19 FINANCIAL REPORTING CONSIDERATIONS
COVID-19 poses significant business risks that need to be effectively managed – a top priority.
Unfortunately, major financial-reporting and auditing consequences will follow the virus's economic impact and social distancing. These need to be understood by boards and CFOs and processes put in place to deal with them. Such plans are unlikely to be set and forget.
Financial-reporting issues that immediately come to mind are the uncertainties associated with the going-concern basis of accounting, trigged impairment indicators for non-financial assets, impairment of financial assets under the expected-credit-loss model, changes to estimates and judgements, increased provisions, and more disclosures required in financial reports and statements.
These will require extra attention in times of constrained resources and unavailability of staff.
Also, as business processes change due to strategies such as working from home, internal controls can be weakened, increasing the risks of non-compliance with laws, regulations, and fraud.
Act now of your assessment financial reporting and related considerations to minimise your risks.
Going concern revisited
AASB 101 Presentation of Financial Statements is the reference on going concern basis of accounting for preparers and will require much more consideration in the COVID-19 environment.
The rules are:
- When preparing financial statements, management must make an assessment of an entity's ability to continue as a going concern
- The financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so, and
- When management is aware, in making its assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern, the entity shall disclose those uncertainties.
- When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.
In assessing whether the going concern basis is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period.
The degree of consideration depends on the facts in each case.
When there has a history of profitable operations and ready access to financial resources, management may reach a conclusion that the going concern basis is appropriate without detailed analysis.
In other cases, management may need to consider a wide range of factors relating to current and expected profitability, debt repayment schedules and potential sources of replacement financing before it can satisfy itself that the going concern basis is appropriate.
In the current environment, management will need to have made a more detailed assessment of the suitability of the going concern basis than would have otherwise been the case. The disclosures in the financial statements will have to be more extensive, such a management plans to address the uncertainties with the application of the going concern basis. Dan Wade is the audit expert at Wrights Chartered Accountants, make an appointment to speak with him here .
