The drops in economic indicators that we have recently experienced only confirm what we all already knew: the COVID-19 pandemic is massively impacting our economies. Even though many countries are slowly returning to some kind of normality, it is clear that the economic distortion and financial impacts of the pandemic will accompany us for a long time to come. Companies will have to reflect this in their 2020 interim financial statements.
Is the preparation of interim financial statements business as usual?
Far from it. Preparing interim financial statements in the current environment is not just a roll-forward of the last annual financial statements. Instead, the focus will lie on:
- Reflecting the economic and financial impacts of the pandemic in budgets and forecasts,
- Recognizing its impacts on the numbers in the interim financial statements, and
- Providing transparent and meaningful disclosures.
Let’s have a closer look at each key focus area.
Budgets and forecasts
How to deal with uncertainty when preparing budgets and forecasts?
Three words describe it best: update, update, update.
The current situation is very dynamic, volatile and unpredictable. Who would have thought for example that oil prices could ever become negative? Estimating how fast the situation will recover and market participants begin to adapt to new realities requires significant judgement. What is clear, though, is that the budgets and forecasts prepared as of 31 December 2019 are no longer appropriate. But how should a company deal with the current uncertainty when updating budgets and forecasts?
Even economists are struggling to predict future developments. Therefore, companies should prepare multiple, plausible scenarios (including a downside scenario) and factor in external information to make budgets and forecasts more robust. This process should be highly dynamic to make sure that the scenarios reflect the latest updates on the situation as at the reporting date.
What are the knock-on effects of updates to budgets and forecasts?
Budgets and forecasts are used for multiple purposes when preparing interim financial statements. For example, when assessing:
- the going concern assumption,
- the need to recognize an impairment, and
- the recoverability of deferred tax assets.
The respective assessments need to be revisited based on the new budgets and forecasts and generally need to be made consistently when preparing interim financial statements.
Impacts on numbers in interim financial statements
How is COVID-19 influencing the interim financial statements?
Accounting implications of the COVID-19 outbreak itself, state and private countermeasures, and knock-on effects can be pervasive and vary, depending on the company’s individual situation. Typically, impacts may include:
- Impairments on goodwill, other intangible assets and property, plant & equipment,
- Write-offs of inventory,
- Increased expected credit losses on receivables,
- Write-offs of deferred tax assets,
- Financial liabilities becoming current due to breaches of covenants,
- Recognition of government grants,
- Revaluation of net defined benefit obligations, and
- Adjustments to revenue.
Obtaining the full picture can be complex and will require an impact analysis. Our talkbook supports you in identifying potential impingements and the accompanying frequently asked questions guide you in developing appropriate accounting treatments. You will find the link to those resources at the end of this blog.