COVID-19: How should companies assess COVID-19 related events after the reporting date?
How should companies assess COVID-19 related events
Companies need to exercise significant judgement in determining how and which events after the reporting date are to be recognised in the financial statements prepared under Dutch GAAP.
What’s the issue?
The COVID-19 coronavirus pandemic has evolved rapidly in 2020 and it impacts how companies evaluate and disclose events after the reporting date (‘subsequent events’).
The financial statements are prepared as per balance sheet date and therefore reflect all events that provide evidence of conditions per the balance sheet date. The actual financial situation at the balance sheet date determines the measurement of balance sheet items and the result determination.
Subsequent events, both favourable and unfavourable, can be classified according to their nature in the following two categories
- Events that provide further information about the actual situation as of the reporting date. These are eligible for recognition in the financial statements, depending on the period in which these have occurred.
- Events that provide no further information about the actual situation as of the reporting date (‘non-adjusting events’). These events shall not be recognised in the balance sheet or the profit and loss account, but shall be disclosed. There is one exception to this, if those events have a significant importance for the legal entity because the going concern assumption is no longer appropriate. When it becomes apparent after the balance sheet date discontinuity is inevitable, the legal entity shall no longer prepare its financial statements on the basis of going concern.
|Subsequent events||Up to the date of preparation of financial statements||Up to the date of adoption of financial statements by general meeting|
|Further information on the actual situation per the reporting date||Recognise in the financial statements.||Only recognise in the financial statements insofar as indispensable for the insight.|
|No further information on the actual situation per the reporting date||
1. events with significant financial consequences. These events shall be disclosed in the notes;
2. events of significance are disclosed in the management report;
3. event of significant importance to the legal entity that the going concern assumption is no longer appropriate.
1. Event of significant importance to the legal entity that the going concern assumption is no longer appropriate.
Given the unknown development of COVID-19 and the (possible) actions taken by the government and private sector, companies must carefully evaluate information which provide additional evidence of conditions that exist per the reporting date and what are non-adjusting events. A company may need to disclose the nature of the judgements including the associated assumptions in the circumstance that a company has applied significant judgement in the process of concluding how an event shall be categorised.
Getting into more detail
Impact at reporting date(s)
31 December 2019 and 31 January 2020
For 31 December 2019 financial statements, the financial reporting effects of the COVID-19 outbreak are generally non-adjusting events (with the exception of going concern) because the significant changes in business activities and economic conditions occurred as a result of events arising after the reporting date – e.g. actions taken by the government and private sector to respond to the COVID-19 outbreak.
Certain events did occur before 31 December 2019 – e.g. the Wuhan Municipal Health Committee issued an urgent notice about the virus on 30 December 2019 and cases were reported to WHO on 31 December 2019. However, the announcement by WHO that coronavirus was a global health emergency was made on 30 January 2020 – i.e. after the end of a 31 December reporting period. Many actions taken by governments and the private sector to respond to the outbreak followed this announcement and therefore after 31 December 2019. For example, on 12 March 2020 the Dutch government imposes additional measures for the Netherlands and on 31 March these measures were extended. Therefore, based on the information about the outbreak that was reasonably available as at 31 December 2019, it is likely that market participants would have made either no adjustments to their assumptions, or only inconsequential changes, based on their assessments of the available information and associated risks as at that date.
For companies with reporting periods ending after 1 January 2020, the COVID-19 outbreak is likely to be a current-period event that will require ongoing evaluation to determine the extent to which developments after the respective reporting date should be recognised in that reporting period.
The effects of the COVID-19 outbreak did not have a significant impact on markets and share prices until after 31 January 2020. Accordingly, concluding that developments after 31 January 2020 provide more information about the circumstances that existed at 31 January will be challenging unless the COVID-19 outbreak had a significant impact on the company as at 31 January (e.g. the company had significant operations in China). If management determines that developments after 31 January 2020 are adjusting events for 31 January reporting dates, then this will probably be a significant judgement that would require clear disclosure, including the reasons why management concluded that these developments are evidence of conditions that existed at the reporting date.
Subsequent periods – Including 29 February and 31 March 2020
For companies with reporting periods ending in February or March 2020, and calendar year-end companies reporting in the first quarter of 2020, the COVID-19 outbreak is likely to be a current-period event that will require ongoing evaluation to determine the extent to which developments after the respective reporting date should be recognised in that reporting period.
As the impacts of the COVID-19 outbreak continue to evolve rapidly and unexpectedly, identifying events that provide further evidence on conditions that existed at or before the reporting date will require careful assessment. To do that, companies need to carefully and continuously assess their specific facts and circumstances to identify events that generally represent the culmination of a series of conditions that existed at or before the reporting date.
For non-adjusting events which have significant financial consequences, companies are required to disclose the nature of the event and an estimate of its financial effect, or a statement that an estimate cannot be made. Also events with significance, that occur after the reporting date that do not provide further information on the actual situation on the reporting date, that have an impact on the expectation set out in the management report are disclosed in the management report.
As the date of preparation moves further from the reporting date, users might expect that a company would have more information available to disclose an estimate of the financial effects of a non-adjusting event.
Actions for management to take now
When assessing the impact of COVID-19 events after the reporting date, management may need to do the following.
- Identify and consider all subsequent events until the date the financial statements are prepared and determine whether these events are adjusting – i.e. they provide evidence of conditions that existed as at the reporting date or indicate that the going concern assumption is inappropriate.
- Disclose the nature and financial effects of events that are considered to be material, even if they are non-adjusting.
- Disclose significant event in the management report, even if they are non-adjusting.
- Disclose significant judgements and the related assumptions in distinguishing the type of subsequent events.
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