Impact of Covid-19 to Accounting: Contingent Asset, Income Taxes and Government Assistance

This third installment of the series will discuss the impact of Covid-19 to contingent assets, income taxes, and government assistance. This article and other articles in the series 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.

1. Contingent asset

Contingent asset is defined by IAS 37 as: “a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity”. Entities need to disclose contingent assets where economic benefits inflow is probable, and when the realization of income is virtually certain, then the asset must be recognized in the statement of financial position. As a result of entities closing down their business, they might recover the costs through their insurance policies (if they have any). Entities must assess whether such reimbursement meets the criteria of contingent asset, and determine the appropriate accounting treatment, whether to disclose it or to recognize it, in accordance with IAS 37.

2. Income taxes

Income taxes is covered in IAS 12, in which it prescribes, among others, when deferred taxes should be recognized. Unlike deferred tax liabilities (DTL) which should be recognized, deferred tax assets (DTA) is recognized for deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. As a result of Covid-19, entities must assess whether in the future, taxable profit will be available to be used against DTA. If entities think that it is no longer probable that there will be sufficient taxable profit, then DTA must be derecognized (reduced). In addition, entities must also consider deferred tax consequences that arise because of differences between assets and liabilities carrying amount and tax base. For example, the carrying amount of assets might be reduced due to impairment, as discussed in the second article.

3. Government assistance

To support entities that are facing financial difficulties as a result of Covid-19, governments in various jurisdictions are planning to give or are currently giving some forms of assistance to help entities survive this situation, for example by giving out loans with interest rate lower than the market rate. IAS 20 provides the standard to deal with such government grants and other forms of government assistance. According to this standard, two criteria must be fulfilled to recognize government grants: that there is reasonable assurance that the entity will comply with the grant conditions and that the grant will be received. In circumstances when the value (benefits) received from government assistance can not measured reliably, then it should be disclosed. Entities must be aware that IAS 20 does not include income-based tax credits that are dependent on taxable income, which falls under the scope of IAS 12. When entities assess that definition and recognition criteria of government grants are met, then they must treat, measure, and disclose the grants accordingly as explained in IAS 20.

Sources:

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

IFRS Foundation, IAS 12 Income Taxes

IFRS Foundation, IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

IFRS Foundation, IAS 37 Provisions, Contingent Liabilities and Contingent Assets

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

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