The economic consequences and uncertainties resulting from the Coronavirus itself or from actions taken by governments and the private sector to respond to the outbreak may for example have an impact on (non-exhaustive list):
- Assets and liabilities measured at fair value,
- Impairment of intangible and tangible assets,
- Net realizable value of inventory,
- Recoverability of deferred tax assets,
- Expected credit losses on financial assets,
- Classification of financial liabilities as current or non-current, and
- Classification as contingent liability.
Fair value measurement reflects the conditions as of the measurement date. This may be particularly challenging when fair value measurement is based on unobservable inputs and circumstances are changing rapidly.
The current situation may trigger an impairment testing, e.g. due to significant adverse changes in the company’s market or mass cancellations of orders. In addition, the impairment test itself can be impacted as previous expectations about future cash flows may need to be updated.
There may be less demand for some goods, which in turn may create pressure on sales prices and / or result in less inventory turnover, thus leading to additional write-downs to net realizable value.
As the economic outlook deteriorates and the company’s earnings decline, recoverability of any recognized deferred tax assets should be carefully verified.
Expected credit losses are based on information about past events, current conditions and the prediction of future economic conditions. Economic difficulties of customers and the negative economic outlook in general may require an increase in the provision for expected credit losses of financial assets.
If the financial situation of the company deteriorates, financial covenants may be triggered. As a consequence, the financial liabilities will become immediately repayable. If this cannot be remediated before the reporting date, classification of the respective financial liabilities as current liabilities is required, regardless of the remaining contractual term.
Liabilities previously meeting the definition of a contingent liability may need to be reconsidered and recognized on the balance sheet.