COVID-19: FINANCIAL REPORTING CONSIDERATIONS
The purpose of this publication is to highlight some of the key considerations that should be
put to account in the preparation of financial statements as well as some of the disclosures
that entities should make in the financial statements in the wake of the corona virus outbreak.
Introduction
Covid-19 has already had a significant impact on global financial markets and could have
accounting implications on entities. Some of the impacts that have been experienced or will be
experienced include the following:
- Interruption in production.
- Unavailability of personnel.
- Reduction in revenue, earnings and productivity.
- Inability to raise both equity and debt financing.
- Increased financial instruments value volatility.
- Disruptions in the supply chain.
- Decline in both local and international tourism
Entities must therefore carefully consider their unique circumstances and risk exposures in
their analysis of the effects the pandemic may have on their financial reporting. Entities must
consider the following:
ACCOUNTING CONSIDERATIONS
Entities should consider the impact of Covid-19 pandemic on accounting and disclosure of the
following:
- Material judgements and uncertainties.
- Liquidity risk management.
- Currency risk management.
- Expected credit loss provisions.
- Valuation of inventories.
- Events after the reporting period.
- Employment termination benefits.
- Modification of contractual arrangements.
MATERIAL JUDGEMENTS AND UNCERTAINTIES
When reporting under conditions of uncertainty, it is important to provide users of the financial
statements with sufficient descriptions of the sources of material uncertainties and the
significant judgments that have been considered in the preparation of the financial information
and any assessments of the possible impact of the material uncertainties as well as the
measures established by the entity’s management to mitigate risks resulting from the
uncertainties.
IMPAIRMENT OF NON-FINANCIAL ASSETS
Entities will need to assess whether COVID-19’s may have led to impairment of assets including
goodwill. The unfolding events of COVID-19 may directly or indirectly affect the financial
performance and estimated future cash flows and earnings .IAS 36 Impairment of Assets
requires that entities conduct an impairment test at the end of each reporting period when there
is an indication that the cash generating unit may be impaired. Indicators of impairment may
include significant changes with an adverse effect on the entity that have taken place during
the period or expected to take place in the near future in the :
- Market or economic environment in which the entity operates and;
- Extent to which ,or the manner in which ,an asset is used or is expected to be used (for
example plans to restructure or discontinue the operation to which an asset belongs or
plans to dispose of an asset before the earlier expected date of disposal.
Because of COVID -19, entities may need to perform an impairment assessment, in addition to
the annual assessment, on the assets.
LIQUIDITY RISK MANAGEMENT
Because of disruptions in production and reduced receipts of outstanding balances from an
entity’s debtors coupled with the inability to raise both equity and debt financing, an entity may
have adverse effects on an entity’s working capital. Entities will therefore need to consider
providing sufficient disclosure to the users of financial statements on how the COVID-19 has
affected its operations and working capital and how it intends to mitigate this risk.
CURRENCY RISK MANAGEMENT
Because of COVID-19, there is an imminent foreign exchange rate volatility, which will ultimately
affect entities trading in more than one currency. Entities will therefore require making sufficient
disclosure on the currency risk exposures they are facing and the measures they have or are
putting in place to deal with such risks.
EXPECTED CREDIT LOSS (ECL) PROVISIONS
COVID-19 may affect the ability of both individual and corporate borrowers to meet their
contractual obligations as and when they fall due. The probabilities of default and loss given
default are also expected to increase due to significant increase in credit risk (SICR) and decline
in the value of assets used as collateral. A significant increase inn credit risk will be due to such
factors as loss of employment for individual borrowers or loss of revenue for corporate and
individual borrowers.
IFRS 9 Financial instruments requires that an entity measure ECL in a manner that reflects:
- An unbiased and probability weighted amount that is determined by evaluating a range of
possible outcomes (usually best case, base case and worst case scenarios are
sufficient) - The time value of money (discounting of future cash flows) and ;
- Reasonable and supportable information that is available without undue cost or effort at
the reporting date about past events, current conditions and forecasts of future
economic conditions.
Entities will therefore need to assess whether expected credit loss provisions on outstanding
trade receivables, loans ,guarantees and commitments have been affected due to the
Significant increase in credit risk both in the past, current and future periods due to COVID-19
and provide sufficient disclosure on the same as per IFRS 7 :Financial Instruments :Disclosures
EVENTS AFTER THE REPORTING PERIOD
IAS 10 Events after the reporting period requires that an entity evaluate two sets of events taking
place after the reporting period and before issuance of financial statements: Adjusting and
non-adjusting events.
Adjusting events refer to those events taking place after the reporting period, which reflect
conditions, which existed at the end of the reporting period. An entity must adjust the financial
statements to incorporate adjusting events and make sufficient disclosure of the nature of such
events.
Non-adjusted events are events taking place after the reporting period, which do not reflect
conditions that existed at the end of the reporting period .Entities are not required to adjust
financial statements to incorporate non-adjusted events. They, however, are required to make
disclosure on the nature of such events.
CONCLUSION
In conclusion, entities must therefore assess their effects of COVID-19 on their operations and
performance and ensure that sufficient disclosures have been made in the financial statements
Samson Okari
IFRS Specialist
