The magnitude of disruption from the Covid-19 pandemic has significantly impacted organizations of all sizes, across all industry sectors. Management and those charged with governance (TCWG) are having to make difficult decisions daily about operational, financial, and strategic matters.
The consequences on financial statement reporting and audit engagements are complex. There is an unprecedented level of uncertainty about the economy, future earnings and many other inputs that represent fundamental elements of financial reporting. There will be multiple financial reporting implications to be considered by preparers of financial statements for the purposes of reporting in the short and potentially medium term.
The responsibility for preparing and overseeing financial reporting is with management, with oversight from TCWG. They will have to exercise significant judgment in the current business environment. Of particular importance is:
This web page covers many of the key financial reporting challenges and implications from Covid-19 and highlights various resources which are available on the dedicated IFAC Covid-19 website. References and quotes are given from numerous international standards. Not all aspects of those international standards are discussed – as such, readers should refer to those international standards for all the requirements. There may be differences in approach depending on whether financial statements are prepared using IFRS or national GAAP.
Professional accountants must remain focused on their ethical responsibilities and on the public interest. It is important for them to exercise heightened diligence and professional judgment to combat higher risks of financial misrepresentation and fraud, and to ensure government and other assistance is used appropriately. The application of the IESBA International Code of Ethics for Professional Accountants (including International Independence Standards), including compliance with the fundamental principles (integrity, objectivity, professional competence and due care, confidentiality and professional behavior) is key to preservation and expansion of public trust in all professional accountants .
Professional accountants will be asked to produce, analyze, and deliver the information upon which critical decisions will be made. The Code requires that in preparing or presenting information, professional accountants do so in a manner that is intended neither to mislead nor to influence contractual or regulatory outcomes inappropriately. The Code also requires professional accountants to exercise professional judgment to represent the facts accurately and completely in all material respects; describe clearly the true nature of business transactions or activities; and classify and record information in a timely and proper manner.
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There is a need for clear and transparent disclosures by companies on how fair value measurement and value in use have been determined, including key inputs and assumptions as well as disclosures of significant non-adjusting post balance sheet events.
Fair Value Measurement and Impairment of Non-Financial Assets Resources
Expected Credit Losses for Financial Assets Resources
The amendment is effective June 1, 2020, but lessees can apply the amendment immediately in any financial statements (interim or annual) not yet authorized for issue.
The FASB (through Staff Q&A) addressed certain challenges for lessors and lessees by permitting payment holidays/deferrals arising as a result of COVID-19 not to be considered a lease modification.
In many geographies, IFRS is subject to an endorsement process before becoming a part of the accounting framework (e.g., EU endorsement). This often takes a significant amount of time. If the anticipated amendments to IFRS 16 are not endorsed in a particular geography in time for them to be implemented before the 30 June 2020 period ends, challenges noted below will apply:
Certain of the amendments noted above result in a number of different approaches being permitted when accounting for the effects of lease payment holidays or deferrals. There is a need for clear and transparent disclosures about the approach that has been followed and its related impact.
Lease Accounting Resources
In addition, some of the changes may impact the timing of the reversal of temporary differences.
Deferred Tax Assets/ Government Support Resources
Covid-19 could affect the assumptions made by management in measuring the revenue from goods or services already delivered, particularly for variable consideration and for the anticipated outcome of contacts extending over multiple reporting periods.
For example, reduced demand could lead to an increase in expected returns, additional price concessions, reduced volume discounts, penalties for late delivery or a reduction in the prices that can be obtained by a customer. A company may also modify its enforceable rights or obligations under a contract with a customer such as granting a price concession in which is it is necessary to consider whether the concession is due to the resolution of variability that existed at contract inception or a modification that changes the parties’ rights and obligations.
FASB has voted to extend by one year the effective date of its revenue recognition standard to all private companies and private not-for-profit entities that have not yet issued their financial statements. The effective date will be for fiscal years beginning after December 15, 2021.
Revenue Recognition Resources
In response to the COVID-19 pandemic, jurisdictional law or regulation, securities regulation, stock exchange rules or standard setting bodies may:
Fair Presentation Framework Compared to a Compliance Framework
A fair presentation framework acknowledges, explicitly or implicitly, that to achieve fair presentation of the financial statements, it may be necessary for management to:
A compliance framework requires compliance with the requirements of the framework, but it does not require additional disclosures beyond the framework or permit departure from the framework.
IAS 34
A commonly used fair presentation framework is the International Accounting Standards Board’s (IASB) International Accounting Standard (IAS) 34, Interim Financial Reporting. Without mandating when an entity should prepare such a report, IAS 34 permits less information to be reported than in annual financial statements (on the basis of providing an update to those financial statements) and specifies minimum components to be reported; condensed primary statements and certain explanatory notes. Additional line-items or notes are required to be included if their omission would make the interim financial information misleading. Further if a complete set of financial statements is published in the interim report, those financial statements should be in full compliance with IFRSs.
Importantly, that all events and transactions are recognized and measured as if the interim period is a discrete standalone period (i.e. there are no exemptions from recognition or measurement for that period other than on the grounds of materiality; for example, it may not be necessary to obtain an updated actuarial valuation for an employee defined benefit plan, but only if it can be assessed that the effects of not obtaining that update are not material).
Management Responsibilities
As part of management’s responsibility for preparing the interim financial information, ordinarily management is expected to clearly indicate the applicable financial reporting framework that has been used to prepare the interim financial information so that users are informed. Management should be transparent and include comprehensive disclosures around the basis of preparation of interim statements and (if a review report has not been published) whether the auditor has carried out an interim review.
Issues arising from COVID-19 which may affect management’s preparation of interim reporting include:
The Independent Auditor’s Report - Review of the Interim Financial Information
Jurisdictional law or regulation, securities regulation, stock exchange rules, or national standards may require that the interim financial information of an entity be reviewed by the independent auditor of the entity. In cases when a review is not required, the entity may choose to have the interim financial information reviewed. When an auditor performs a review of the interim financial information, the engagement is typically performed in accordance with the International Standard on Review Engagements (ISRE) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the IAASB (note some jurisdictions have established their own standard for auditors when performing a review of interim financial information).
For review engagements in accordance with ISRE 2410, the auditor expresses a conclusion whether, on the basis of the review, anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with an applicable financial reporting framework. The auditor makes inquires and performs analytical and other review procedures.
The objective differs significantly from that of an audit conducted in accordance with International Standards on Auditing (ISAs) as it is not designed to obtain reasonable assurance (i.e., the auditor obtains only limited assurance from the procedures performed). A review of interim financial information does not provide a basis for expressing an opinion whether the financial information gives a true and fair view, or is presented fairly, in all material respects, in accordance with an applicable financial reporting framework. A review may bring significant matters affecting the interim financial information to the auditor’s attention, but it does not provide all of the evidence that would be required in an audit.
For more detail on the independent auditor’s report on a review of the interim financial information please see specific section on the Summary of Covid-19 Audit Considerations webpage.
Interim Reporting Resources
This webpage will continue to evolve. Readers are invited to share experiences on areas covered, additional challenges and other resources which they have found particularly helpful.
General Resources
The following general resources may be helpful (please note that all resources are listed alphabetically by author and reflect no order of relative importance):
Professional accountants may also be interested in the dedicated IFAC Covid-19 audit considerations web page.
