Accounting Implications of COVID-19
COVID-19 has already had a significant impact on global financial markets, and there may be accounting implications for many entities.
Keywords: Mazars, Thailand, Accounting Implications, Audit, Financial Statement, TFRS, NPAEs, TAS
Updated: 2 April 2020
Below are some key issues that entities preparing financial statements applying full TFRS or TFRS for NPAEs for periods ending on or after 31 December 2019 should consider. These do not address management or risk reporting, which also need to be considered.
Some of the key factors that will be affected include:
- Interruptions of production
- Supply chain disruptions
- Unavailability of personnel
- Reductions in sales, earnings, or productivity
- Closures of facilities and stores
- Delays in planned business expansions
- Inability to raise financing
- Reduced tourist numbers, disruptions in nonessential travel and sports, cultural, and other leisure activities
In addition, it may be appropriate for entities to consider the possible impact of the outbreak on accounting conclusions and disclosures related to the following areas:
- Allowances for doubtful accounts
- Valuation of inventories
- Restructuring plans and the breach of loan covenants (including impact on the classification of liabilities as current vs non-current)
- Going concern issues
- Events after the end of a reporting period
- Employment termination benefits
Please note that, as a non-adjusting event, the impact of the COVID-19 outbreak should not be factored into the financial statement balances and accounts as of 31 December 2019, but will impact disclosures, including those related to subsequent events, going concern issues (if the entity is no longer viewed as a going concern) and sources of estimation uncertainty.
Going concern issues
TAS 1, “Presentation of Financial Statements”, and paragraph 12 of TFRS for NPAEs requires management to assess whether the entity is able to continue as a going concern, and whether the going concern assumption is an appropriate basis for preparation of the financial statements.
When assessing the appropriateness of the use of the going concern assumption, entities are required to consider events both before and after the reporting date, up to the date of authorization of the issue of the financial statements, regardless of whether those events are adjusting or non-adjusting events according to TAS 10 and paragraph 315 of TFRS for NPAEs.
As a result, management (and the auditor) should consider the impact of the COVID-19 outbreak on the economic conditions of the entity, and whether the event has introduced a material uncertainty to the entity’s ability to continue as a going concern. In their assessment, management could consider the actual and projected foreseeable impact of various factors, such as the following:
An entity shall not prepare its financial statements on a going concern basis if management determines, after the reporting date, on the basis of the assessment above, that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so.
Furthermore, disclosures are required when the going concern basis is not used or, if the going concern assumption is maintained, when management is aware of material uncertainties relating to the entity’s ability to continue as a going concern.
Financial statements as at 31 December 2019
Considering information that was available as at the 2019 year-end, the management must consider the COVID-19 outbreak as a non-adjusting event in the 31 December 2019 financial statements.
TAS 10 and paragraph 315 of TFRS for NPAEs - events after the reporting period
These events include those, both favourable and unfavourable, that occur between the end of the reporting period and the date on which issue of the financial statements is authorized.
The two types of events are:
(i) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events); and
(ii) those that are indicative of conditions that arose after the reporting period (non-adjusting events).
Financial statements as at 31 December 2019
As the COVID-19 outbreak became public knowledge and began to have an impact after 31 December 2019, it is proposed that the impact of COVID-19 be considered a non-adjusting event.
However, if non-adjusting events after the reporting period are material, the entity should disclose these matters in their 31 December 2019 financial statements.
Areas to consider
If the impact of the COVID-19 outbreak is material, the entity is required to disclose the nature of the impact and an estimate of its financial effects.
Financial statements of periods ending after 31 December 2019
Management needs to consider the possible accounting implications of their response to the COVID-19 outbreak:
It is important to assess whether any significant change in such terms and conditions would result in a modification or extinguishment of the financial instrument which would have different accounting implications.
A breach of a debt covenant may trigger a clause for repayment on demand that may be included in the loan agreement, which gives the bank the right to demand repayment at any time, at its sole discretion. This could have an impact on the classification of current/non-current bank borrowings, and consequently trigger other events. Should a waiver be deemed necessary, it is important to note that the waiver must be obtained from the bank as of the reporting date to avoid the reclassification of the non-current bank borrowings.
Disclosure will be key for many entities, as the impact of COVID-19 involves significant judgement. Disclosures should allow the users of financial statements to identify the key assumptions made about the impact of the outbreak on material estimates and the main sources of estimation uncertainty that could result in material adjustments to the carrying amount of assets and liabilities. Whenever possible, an entity should provide a sensitivity analysis or a range of outcomes (see below).
Disclosure of sources of estimation uncertainty (including risks)
TAS 1 requires the disclosure of assumptions made about the future and of other major sources of uncertainty creating a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the ensuing financial year. Specifically, disclosure relates to estimates that require management's most difficult, subjective, or complex judgments and should include the following:
1. the nature of the assumptions or other estimation uncertainty;
2. sensitivity of carrying amounts to the methods, assumptions, and estimates underlying their calculation; and
3. the expected resolution of the uncertainty and the range of reasonably possible outcomes within the next financial year. While it may not be practicable to determine the extent of the possible effect of an assumption or other source of estimation uncertainty on a particular asset (or group of assets) or liability, IAS 1 requires identification of the asset or liability (together with disclosure of its carrying amount) and a statement to the effect that it is reasonably possible, on the basis of existing knowledge, that outcomes within the next financial year will be different from the assumptions now being made (i.e., which could require a material adjustment to the asset's or liability's carrying amount).
Other financial communications from the regulators
1. The Securities and Exchange Commission of Thailand (“SEC”) allows listed ompanies with their core business in countries affected by the COVID-19 outbreak to postpone the submission of financial statements on the condition that a written request is submitted for the SEC’s consideration on a case-by-case basis before the submission deadline expires.
In addition, the SEC has indicated that it will grant listed companies, with a financial year-end of 1 January 2020 to 31 May 2020, an extension of their filing deadline to 120 days after year-end, which is increased from the standard 60 days.
Currently, listed companies with a financial year-end of 1 January 2020 to 31 May 2020, are still required to submit their full-form annual report no later than four months after their financial year-end. However, the SEC are reviewing this requirement.
For listed and regulated company quarterly reporting for the period ended 31 March 2020, the SEC extended the reporting deadline to be three and a half months after the end of the quarter (instead of the usual 45 days).
2. The Office of Insurance Commission (“OIC”) allows insurance companies (life or non-life insurance) that are affected by the COVID-19 outbreak to postpone the filing of financial statements and operation reports on the condition that a written request is submitted for the OIC’s consideration on a case-by-case basis before the filing deadline expires.
The extension of submission is within 30 days after the regular deadline except for other conditions that the OIC has approved.