Due to the pandemic, amounts recognized in the financial statements must be adjusted to reflect changing events. Management needs to continually review and update assessments to ensure that up to the date financial statements are issued given the fluid nature of the crisis and the uncertainties involved.
This can be burdensome. But with automation, siloed manual finance processes can give way to cloud-based solutions that vastly simplify reporting, planning, forecasting and analytics.
We outline below numerous accounting implications that should be considered given recent events, and suggest how to address them.
Foreign currency translation
An entity is required to translate foreign currency transactions into the reporting/functional currency using the spot rate in effect on the date of the transaction. As a practical expedient, an entity may translate revenue earned and expenses incurred in a foreign currency using an average rate (ex. A monthly or annual average).
In years when exchange rates remain fairly stable, the difference between using the spot rate vs. the average rate will be insignificant. However, some exchange rates are fluctuation significantly during this period of economic uncertainty. As a result, an entity may need to revisit the way it translates foreign currency transactions in its income statement and assess whether its current accounting is appropriate.
Accounting for financial assets
There has been a severe decline in the fair value of many financial assets, particularly equity securities. Likewise, the ability of debtors to comply with the terms of loans and similar instruments has been adversely affected. Entities will need to carefully consider and apply the appropriate measurement and impairment loss recognition requirements.
In making this assessment, management will need to take into account all information available up to the date of authorisation of the financial statements (in certain jurisdictions, local regulations may extend this period). The information to be considered includes government announcements affecting the ability of an entity to operate and of any government assistance programmes to which the entity may be entitled. When management is aware of material uncertainties that cast a significant doubt on the entity’s ability to continue as a going concern, IAS 1:25 requires the entity to disclose those material uncertainties in the financial statements. The disclosure should be specific to the entity’s own situation, for example explaining how and when the uncertainty may crystallise and its impact on the entity’s resources, operations, liquidity and solvency.
Statement of profit or loss
IAS 1:97 requires that “[w]hen items of income or expense are material, an entity shall disclose their nature and amount separately”. The impact of COVID‑19 may give rise to material expense or income items for many entities, for example restructuring provisions and impairment losses related to non‑financial assets. When it is practicable to identify specifically and quantify such discrete items, they should be disclosed separately either in the statement of profit or loss and other comprehensive income or in the notes to the financial statements, with appropriate explanation of those amounts.
An entity should also consider the requirements in IAS 1:85 to present additional line items, headings or subtotals when such a presentation is relevant to an understanding of the entity’s financial performance. However, the presentation of items as being “extraordinary” is specifically prohibited by IAS 1:87. In determining if an item should be presented separately, or a heading or subtotal added, an entity should consider:
• The nature and magnitude of the costs; and
• The rationale for creating a new header or subtotal and its usefulness.
Events after the end of the reporting period
Given the economic environment and the likelihood that events may occur rapidly or unexpectedly, entities should carefully evaluate information that becomes available after the end of the reporting period but before the date of authorisation of the financial statements. The amounts in the financial statements must be adjusted to reflect events after the end of the reporting period that provide evidence of conditions that existed at the end of the reporting period. Events that are indicative of conditions that arose after the reporting period are non‑adjusting events. They are not reflected in the recognition or measurement of items in the financial statements, but require disclosure when material.
Often the “events” are (1) company‑specific; and (2) associated with a specific account that permits a more precise analysis. However, sometimes the “events” are macroeconomic in nature (such as those resulting from COVID‑19) and have a pervasive impact on many estimates in a set of financial statements which may make it difficult to ascertain whether such conditions “existed” at the reporting date. The full impact of the COVID‑19 pandemic on short‑term, medium‑term, and long‑term economic activity is still unknown, and major developments are occurring frequently. However, COVID‑19 will be a factor in an entity’s analysis of estimates made in the preparation of the financial statements, including those related to the expected credit loss on receivables, inventory obsolescence, impairment analyses, variable and contingent consideration estimates, and other factors. Whilst the events stemming from COVID‑19 are extremely volatile, entities will nevertheless be required to consider conditions as they existed at the reporting date when evaluating subsequent events.
Adjust financial disclosures swiftly with automation.
CFOs will need to do the hard work of digitizing and automating core business processes to reduce their exposure to exogenous shocks and create resilience. The fastest and most efficient way to do so is with cloud-based planning platforms such as DataRails or Jedox that automate core processes while requiring little to no change.
