The speed and breadth of the unfolding COVID-19 crisis – dramatically impacting lives and healthcare systems, disrupting business operations and supply chains, slowing markets, and now posing the risk of a global recession – is putting nearly every facet of business to the test. Not since the financial crisis of 2008–2009 have crisis response plans, business continuity and resilience, cash flow, scenario planning, and corporate leadership come under such intense pressure.
Navigating the uncertainty requires a sharp focus on people, liquidity, operational risks, and contingencies, while keeping sight of the bigger picture: strategy, risk, and resilience. With information changing daily (even hourly), companies should expect to recalibrate their responses—and potentially reframe their thinking about how the COVID-19 crisis is impacting the business—as conditions change.
To help boards in their oversight of the company’s pandemic response—managing through the immediate crisis as well as addressing vulnerabilities exposed by the outbreak—we highlight five key areas for board focus:
Based on our conversations with directors, KPMG subject matter professionals, and others on the front lines of the crisis, these five areas are critical today and in the medium term.
The initial focus on a company’s people and operations in China, Italy, Spain, South Korea, and other coronavirus hotspots is quickly expanding to global levels, with Europe, the UK, and the U.S. seeing spikes in COVID-19 cases. The focus on employee well-being, therefore, should now be proactive, international, and company-wide.
What policies are in place to protect and support employees (e.g. hygiene programs, restrictions on travel and congregation, flexible and remote working policies, healthcare)?
Do we communicate these policies – and provide timely updates – clearly and frequently to employees?
In addition to employees, does the company understand how its other key stakeholders are being impacted by the COVID-19 crisis?
Lessons learned from the 2008 financial crisis – marked by turmoil in world markets, shortages of cash and liquidity, tremendous volatility and uncertainty, and the prospect of a prolonged recession – can provide a basis for boards to consider near- and longer-term financial risks posed by the coronavirus crisis. Among the lessons learned:
Given the uncertainty regarding the economic impact of the COVID-19 crisis, scenario planning is essential.
Understand the array of financial risks to the business and how management is addressing these risks under different scenarios.
Focus on fair value and possible asset impairments that may pose significant risks for the company.
Supply chain disruption is being felt across most industries. The problem has quickly become global, and the complexity has made it challenging to model and evaluate the range of impacts and alternatives. Likewise, the impact of the crisis on workers and the workplace – particularly directives for physical social distancing and the resulting closures of offices, schools, and local businesses – along with the demands on technology systems to support remote working may pose significant operational challenges for the company.
Business strategy: There is little doubt that COVID-19 will cause significant disruption to the local and global business environments. Has the board:
Business continuity: Is the board confident in the company’s business continuity plans?
Supply chain: What measures are being taken to stabilize the company’s supply chain?
Technology: Are the company’s technology capabilities able to support a significant increase in remote working and virtual operations?
Given the fast and fluid pace of the crisis, the directors and business leaders we spoke with all emphasized the critical importance of frequent management updates to the board. The board’s role in a crisis is to stay informed and oversee management’s response, while also letting management do its job.
Understand the scope of the crisis and how management is responding.
Consider the potential impact of the COVID-19 crisis on the board’s operations and effectiveness.
The financial reporting impacts of the outbreak will depend on facts and circumstances, including the degree to which an entity’s operations are exposed to the impacts of the outbreak and the sensitivity of amounts recorded in the financial statements to the more volatile economic conditions.
With respect to financial statements for the year ended 31 December 2019, the financial reporting effects of the outbreak are generally considered to be non-adjusting events, with the exception of going concern under IFRS.
The significant changes in business activities and economic conditions occurred as a result of events occurring after the reporting date of 31 December 2019, such as actions taken by the government and private sector to respond to the outbreak. Therefore, based on the information about the outbreak that was reasonably available as at 31 December 2019, it is likely that entities would either have made no adjustments to their assumptions, or only inconsequential changes, based on their assessments of the available information and associated risks as at that date.
However, the assessment as to whether the going concern basis under IFRS is appropriate takes into account events and conditions after the end of the reporting period. As there have been significant new events and changes in conditions since 31 December 2019, for entities with a calendar year-end, it will be necessary to reflect the impacts of these events and conditions in the going concern assessment.
Read more in our overview of the financial reporting and audit considerations.
For reporting dates after 31 December 2019, companies will need to consider wider impacts of the coronavirus crisis on the financial statements.
Companies should consider whether economic uncertainties and market volatility have, or will affect, accounting conclusions, including:
Companies should also consider potential areas of business risk disclosures, including:
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