The Implications of Accounting Treatment
& Financial Reporting in COVID-19
Implications In COVID | 3 min read
The effects of COVID-19 will extend beyond the lockdown and businesses need to evolve their reporting to indicate the true effects on the measurement of company performance and presents huge challenges for the preparers of financial statements.
The following areas have been highlighted are issues to consider when preparing financial statements:
Going concern and liquidity
Questions on cash flow will increase in particular on whether the business has enough funds to operate in the next 6 to 12 months.
When preparing financial statements, management is required to assess the ability of a company to continue as a going concern, and whether the assumption of the going concern is appropriate. Under the current circumstances, in its assessment, management will need to consider the existing and anticipated effects of coronavirus outbreak on activities.
An asset is impaired when a business is unable to recover its carrying value, either through its use or by sale. Companies are expected to determine at the end of each reporting period if there are any impairments to financial and non-financial assets.
- The impact of COVID-19 have caused a significant deterioration in economic conditions for many companies, and an increase in economic uncertainty for others, which may constitute triggering events.
- Estimating future cash flows could be particularly challenging for many companies due to the increase in economic uncertainty.
- COVID-19 might have a significant impact on the risk-free rate and on entity specific risk premiums (e.g. financing risk, country risk and forecasting risk) used in determining the appropriate discount rate to discount future cash flows.
Fair value measurement
Companies are required to measure some of their assets and liabilities at fair value. This is a time-specific exit price estimate based on assumptions that market participants would make under current conditions. The company should make use of the conditions of the market when making fair value adjustments and assumptions.
Will companies generate sufficient profits to recover deferred tax assets?
Some of these COVID-19 changes may reduce future taxable profits, while others may potentially increase them.
When companies prepare projections of future taxable profits for the purposes of the deferred tax asset recognition test, they would need to reflect expectations at the reporting date and use assumptions that are consistent with those used for other recoverability assessments.
Companies affected by the COVID-19 outbreak may face cash flow challenges due to disrupted operations, increased operating costs or lost revenues. If the company can no longer fulfil debt covenants, they may need to obtain additional funding, change the terms of loan agreements or receive exemptions. In these situations, they would have to decide that any changes to current contractual agreements should be revised.
Companies may renegotiate lease terms as a result of either deferral of instalments or payment holiday’s that will require changes to the original agreement.
Malander Advisory’s highly skilled team can assist your company in ensuring:
- All internal reporting such as budgets, forecasts and FD management reports are compiled taking into account the impact of COVID
- All external reporting such as Financial statements, covenant report are compiled including the new disclosures and assumptions that affect the company as a result of COVID
- Managed resources to assist in ensuring all backlogs resulting from working offsite are done timeously