Impact of Covid-19 to Accounting: Going Concern and Subsequent Events

As we all know, Covid-19 global pandemic affects almost every area of our lives, including accounting. This is the first installment of a series discussing the impact of Covid-19 to accounting. This article and the following installments summarize the impact based on several credible sources, i.e. the Big Four accounting firms, professional accountancy organization and IFAC (International Federation of Accountants). For further and detailed discussion, please refer to the original documents as cited in the sources at the end of this article for further reading, of which the links to access the full report are provided.

In this first installment, we will take a look at how Covid-19 affects going concern and subsequent events. In general, companies prepare their financial statements based on the going concern basis, which means that companies will continue to operate indefinitely in the foreseeable future. However, the current global pandemic situation may cause several companies to question their going concern assumption, in particular for those companies operating in certain sectors which are severely affected compared to others, such as travel, leisure and hospitality and aviation sectors. If there is any material uncertainty surrounding the going concern assumption, then companies must disclose it in their financial reports, so that the users are aware of this issue. If at the end it is deemed that companies may no longer continue to operate under going concern assumption, then financial statements could be prepared using liquidation basis. Since different entities will be affected differently, it requires judgment to assess whether Covid-19 interferes with the going concern assumption. In addition, companies must continually update the situation with the latest development and how it may affect them. In assessing their going concern assumption, companies must also consider the impact of several relief measures taken by the governments, as well as events that take place after the reporting period, i.e. subsequent events.

Subsequent events are events that occur after the reporting period, but before the financial reports are issued. There are two types of subsequent events:

1. Non-adjusting events: events that occur after the balance sheet date, which requires disclosure in the financial reports.
2. Adjusting events: events that exist at the balance sheet date, which requires financial reports to be adjusted.

There has been general consensus that since the outbreak started to occur around the month of January 2020, then for companies whose financial statements ended on 31 December 2019, Covid-19 is regarded as non-adjusting event, hence need to be disclosed. In the disclosure section, financial effects estimation of this events must be provided, however if such quantification can not reliably be estimated, then it can be substituted by qualitative information. In contrast, companies whose financial statements have year end in 2020, would need to treat Covid-19 as adjusting events and assess its impact on accounts that are likely to be affected (to be discussed in the next installments of the series).

Sources:

Accountancy Europe 2020, Coronavirus Crisis: Implications on Reporting and Auditing, 20 March

Deloitte 2020, IFRS in Focus: Accounting Considerations Related to the Coronavirus 2019 Disease, March

EY 2020, Applying IFRS: IFRS Accounting Considerations of the Coronavirus Outbreak, February

Gould, S. & Arnold, C. 2020, The Financial Reporting Implications of COVID- 19, 13 April, IFAC Knowledge Gateway

KPMG 2020, Quick Guide on COVID-19, https://home.kpmg/xx/en/home/insights/2020/03/covid-19-financial-reporting-resource-centre.html

PwC 2020, In Depth: A Look at Current Financial Reporting Issues – Accounting Implications of the Effects of Coronavirus, 17 March

(AL)