20RU-003 Coronavirus outbreak – Potential financial reporting impacts
20RU-003 Coronavirus – Financial reporting impacts
The Coronavirus outbreak could impact an entity’s future forecasts and as a result, various accounting estimates. This Reporting Update considers the potential financial reporting impacts.
What is the issue?
The Coronavirus outbreak started in Wuhan, China and was first reported on 30 December 2019. The responses by various governments and international organisations which highlighted the severity of the outbreak occurred after 31 December 2019. Some of the responses included the following:
- 22 January 2020: China quarantines the city of Wuhan
- 30 January 2020: The World Health Organisation (WHO) declares a public health emergency of international concern over the outbreak
- 1 February 2020: Australia’s Department of Health advises against all travel to mainland China. Entry to Australia from mainland China is denied to all except Australian citizens, permanent residents, their immediate families and air crews. Those permitted entry are required to self-isolate for 14 days.
Various accounting estimates, which depend on future forecasts, could be impacted by the Coronavirus outbreak such as the carrying value of goodwill and the measurement of expected credit losses.
Implications on financial reports
Is the Coronavirus outbreak an adjusting subsequent event for reporting periods ended 31 December 2019?
Although the Coronavirus existed at 31 December 2019, it is the severity of the virus and the responses to the outbreak which may have an impact on an entity’s operations.
These events arose after the reporting period, as such the outbreak is a non-adjusting event for the reporting period ending 31 December 2019 and no adjustment needs to be made to amounts recognised in the 31 December 2019 financial statements.
When assessing whether an entity is a going concern, all relevant information available up to the date the financial statements are issued must be considered.. Events that occurred after the reporting date to respond to the outbreak could have caused a significant deterioration in economic conditions for some entities, and an increase in economic uncertainty for others.
Management may need to assess whether these events or conditions, individually or collectively, cast significant doubt on the entity’s ability to continue as a going concern, or in severe cases, whether the going concern assumption is still appropriate as a basis for the preparation of the entity’s financial statements. If the conclusion is that the consequences of the outbreak have led to a deterioration in operating results and/or financial position after the reporting date that is so severe that the going concern basis of preparation is no longer considered appropriate, the financial statements as at 31 December 2019 would need to be adjusted.
Are any disclosures of non-adjusting subsequent events required for reporting periods ended 31 December 2019?
Entities consider whether the non-adjusting events or conditions related to the Coronavirus arising after the reporting date may be material. If material, an entity discloses the nature of the event and an estimate of its financial effect or a statement that an estimate cannot be made in its 31 December 2019 financial report. Non-adjusting events after the reporting period are material if non-disclosure could influence the economic decisions that users make using the financial statements.
How would the Coronavirus outbreak affect reporting periods ending after 31 December 2019?
Various estimates, which depend on future forecasts, could be impacted.
Examples of specific areas that may be impacted include:
- Impairment of non-current assets and goodwill
- Onerous contract provisions
- Net realisable value of inventory
- Expected credit losses
- Deferred tax assets
- Cash flow hedge accounting
- Significant judgement and estimates disclosures
Refer to our attached Reporting Update for further discussion.
“The potential impacts of Coronavirus continue to evolve. We encourage impacted entities to monitor the situation and maintain close communications with key stakeholders. Changes in circumstances may require additional or enhanced disclosures in financial reports.”
If your entity is potentially affected by Coronavirus and you would like to discuss further, please reach out to your usual KPMG contact.
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