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COVID-19: APPLICATION OF IFRS IN MAKING FINANCIAL STATEMENTS

The impact of COVID-19 is evolving rapidly with varying degrees of individual circumstances. In addition to addressing the severe operational impacts of the coronavirus, it is important for all entities to consider the effects of COVID-19 on their financial statements. We provide a high-level overview of some of the issues to consider during this critical moment.


ISSUES TO CONSIDER WHEN MAKING FINANCIAL STATEMENTS – 31/12/2019 - YEAR-END FINANCIAL STATEMENTS

The following events occurred

According to International Accounting Standard (IAS) 10, Events occurring after the balance sheet date, Events occurring after the balance sheet date are events that have a positive or negative effect. arrears during the period from the end of the accounting period to the date of approval for issue of the financial statements. There are two types of events that occur after the balance sheet date:

a. events that provide evidence of the facts that existed at the balance sheet date (adjusted events occurring after the balance sheet date); and

b. events that provide evidence of events occurring after the balance sheet date (unadjusted events occurring after the balance sheet date).

IAS 10 requires entities to adjust amounts recognized in their financial statements to reflect adjustment events after the reporting period, and entities do not adjust amounts recognized in their financial statements. to reflect unadjusted events after the reporting period. In making this decision, subjects must exercise judgment and consider the facts and circumstances carefully.


A significant deterioration in economic conditions related to COVID-19 began in the first quarter of 2020. Therefore, an entity that has not yet issued its 2019 financial statements needs to assess the estimated impact of COVID -19 and the economic impacts related to its business, as an event. arising later need to be adjusted or not adjusted.


For unadjusted events, entities (directly and indirectly affected) should consider the presentation of the nature of the event and the estimate of the effect on the financial statements, if it can be obtained and quantified. quantifiable, or declare that an estimate cannot be made.


Going concern problems

COVID-19 can have a significant impact on an organization's operations. Going concern issues are considered differently from those relating to "unadjusted post-events". A decline in current or future operating results and financial position after December 31, 2019 may indicate a need to consider whether the going concern assumption is still appropriate or whether any material stability casts significant doubt on the entity's ability to continue as a going concern.

Entities expecting perceived and probable effects related to COVID-19 should be assessed whether the presentation of the financial statements on the going concern basis is appropriate, or disclose if there is a material uncertainty relating to the going concern business. If the going concern assumption is no longer relevant and the effects are expected to be widespread, a fundamental change from the accounting basis to a liquidation basis or other appropriate preparation may be necessary.

Entities should consider the level of analysis that may be required based on the degree of uncertainty surrounding the going concern assumption and the conclusions reached. An entity may need to perform robust predictive and sensitive analyzes to support its position that uncertainties should not be treated as material uncertainties that cast significant doubt. for continuous operation. On the other hand, a qualitative assessment alone may suffice for an entity that has concluded that material uncertainties exist that cast significant doubt on its ability to continue as a going concern.


ISSUES TO CONSIDER WHEN MAKING FINANCIAL STATEMENTS – 31/12/2019 - YEAR-END FINANCIAL STATEMENTS

For entities with a fiscal year end or interim period in 2020, assessments similar to those discussed above are required. Additionally, COVID-19 and related economic effects will have an impact on other areas of financial reporting, such as valuation and impairment. We highlight several areas that may affect the presentation of the financial statements:


Measuring fair value: Financial Instruments

Fair value is defined as the amount that would be received on the sale of an asset or as payment to transfer a liability in an organized transaction between market participants at the measurement date. Entities should consider the relevance and reliability of market prices for. COVID-19 is currently causing volatility in financial markets; however, it is not appropriate to ignore market prices at the measurement date, unless those values are from non-routine transactions. Liquidity in financial markets and access to major markets with current restrictions will also be considered, as will the potential impact on levels: Level 1 to Level 2 and Level 3.

Entities should also pay special attention to fair value measurements that use Tier 3 inputs and ensure these unobservable inputs reflect current economic conditions impacted by COVID-19.

The identification of the main market should be considered from the perspective of the entity. Due to travel restrictions, certain properties may not be sold in their most favorable market. This can also affect adjustments made to level 2 inputs, as common Level 2 adjustments are the condition or location of the asset. We believe this will have the greatest impact on non-financial assets.


Consider fair value: Nonfinancial assets

International Accounting Standards (IFRS) give entities an option to measure assets at fair value. Some of these standards include the following:

  • IAS 40, Investment properties, gives entities an option to measure qualifying properties at fair value.

  • IAS 16, Real Estate, Plant and Equipment, offers entities an option to use a revaluation method where fair value can be measured reliably.

  • IAS 41, Agriculture, requires entities to recognize biological assets at fair value less costs to sell, unless fair value cannot be reliably measured.

  • The following are some of the factors an entity should consider in estimating its fair value for these nonfinancial assets:

  • Lockdowns, social distancing, travel restrictions and quarantines can lead to an increase in the number of people working remotely and affect the vacancy rate of commercial buildings.

  • Border blockades and restrictions can have an impact on entities accessing the main market or the most favorable market. For example, it is not possible to ship unused plant or equipment to a neighboring country, where the selling price is usually higher.

  • Reductions in the risk-free rate and changes in market liquidity may affect the discount rate used in the fair value estimate.


Additional factors detailing the decline in non-financial assets should also be considered.

Diluted IFRS 9, Financial Instruments

Entities have financial instruments (i.e. trade or lease receivables, loans and other receivables, and debt instruments that are not measured at fair value through profit and loss. and contract assets) covered by IFRS 9 are subject to the expected credit loss model for impairment. We expect

COVID-19 may have the following impact:

  • Entities are required to estimate expected credit losses over 12 months or over a lifetime depending on the nature of the financial instrument. At each reporting date, entities are required to assess whether the credit risk on a financial instrument has increased significantly since it was initially recognized. If there is a substantial increase in credit risk since initial recognition, entities are generally required to record a provision for exposures equal to expected lifetime credit losses.

  • Institutions that hold financial instruments owed to customers or other parties will need to understand whether those customers or other parties have been significantly impacted by COVID-19, such as they are experiencing. or are expected to experience financial difficulties. For entities that do not adopt the simple lifetime approach, financial instruments previously measured using expected 12-month credit losses will have to be remeasured using expected lifetime credit losses.

  • To measure expected credit losses, entities are required to combine current conditions and forecasts of future economic conditions. If the debtor's business is expected to be significantly impacted by COVID-19, the expected risk of default could be higher and thus warrant a larger credit loss. Entities will also need to combine and increase the likelihood of virus default scenarios.

  • Entities that use a simple approach to measuring expected credit losses and also contingency matrices will have to reassess current and future projected economic scenarios in relation to their impact. COVID-19.

Invest in joint ventures, associates:

Entities applying the equity accounting method to ventures or investees with significant influence may need to assess the impact of COVID-19 on their investments and determine See if there are any signs of deterioration. Declining non-financial assets


IAS 36, impairment, requires entities to examine goodwill and indefinite intangibles at a minimum annually and other non-financial assets whenever there are signs indicates that the asset is subject to impairment. Current measures enacted by the government requiring businesses to temporarily close and social distancing will impact most businesses and are likely to be a sign of a slowdown.

The following are some of the factors that an entity should consider when determining the recoverable value of a non-financial asset or Cash Generator:

• Impact of closures, social distancing, travel restrictions and quarantine measures on projected revenue and operating costs

• The impact that COVID-19 will have on projected growth factors has been previously estimated on projected discounted cash flows

• Reducing the risk-free rate and changing market liquidity, and their impact on the discount rate

• Given the uncertainty of future events, build probabilistic weighted scenarios into expected projections

In IAS 1, Financial Statement Presentation, entities are also required to disclose information regarding the assumptions they make about the future and other major sources of uncertainty at the end of the reporting period. subject to the risk of material adjustment to the carrying amount of assets and liabilities in the subsequent fiscal year.

Inventories

Inventories must be measured at the lower of cost or net realizable value, with losses being recognized when the net realizable value of inventories is less than cost. As a result of COVID-19, the net realizable value of inventories may decrease due to lower demand or lower commodity prices. The drop in oil demand due to COVID-19 and the resulting significant drop in oil prices, is just one example of the type of inventory that can be warranted to record a loss. In addition, in response to the virus, some units are suspending production. Entities may need to review their inventory valuation methods in order to reallocate capitalized fixed overheads to the income statement.

Reconstruct

Entities significantly affected by COVID-19 may consider reducing their workforce, closing business locations in a country or region, restructuring, or selling or liquidating a group of assets. or part(s). From an accounting perspective, entities need to consider the following:

a. Joint obligations can only be recognized when the entity:

1. Have a detailed formal refactoring plan that identifies at least:

i. The business or part of the business concerned;

ii. Main locations affected;

iii. Location, function and estimated number of employees to be compensated upon termination of their service;

iv. Expenses to be made; and

v. When the plan will be implemented; and

b. Has raised a valid expectation in affected people that it will undertake restructuring by commencing implementation of that plan or communicating its key characteristics to those affected by it

c. A long-term asset will be classified as held for sale and measured at less than its carrying amount and fair value less costs to sell if the carrying amount will be recovered primarily through transaction. sold instead of continuing to use.

g. Whether the sale of a segment or a group of assets represents a decommissioning activity under IFRS 5, Long-term assets held for sale, and Going concern.

Contracts with high risk


A high-risk contract is defined as a contract in which the unavoidable costs of meeting contractual obligations exceed the economic benefits expected to be received under the contract. Contractual unavoidable costs reflect the least net cost of exiting the contract, which is the lower of the cost of performing the contract, and any compensation or penalty incurred as a result of non-fulfillment of the contract. copper. Recent developments and the economic impact of COVID-19 could lead to the following high-risk contracts:

• Revenue contracts that include a material penalty for late delivery and increased contract completion costs due to increased material costs (due to supply chain delays and shortages) and labor costs. (due to staff being quarantined or sent to home)

• Cancellation of contract with a significant financial penalty due to quarantine and closure

If an entity identifies high-risk contracts, the present contractual obligation is recognized and measured as a provision.

Debt Agreement and Covenant


If the impact of COVID-19 causes disruptions leading to cash flow problems, entities may need to modify the terms of existing debt arrangements or obtain waivers for debt arrangements. As a result, debtors may need to determine whether changes to existing debt arrangements would represent a modification or elimination in accordance with the accounting requirements of IFRS 9. If there has been a breach of covenant or other violations at the balance sheet date, the debtor should also consider the classification of long-term liabilities that need to be revised in accordance with IAS 1, Financial Statement Presentation.

Borrowers should note that, if there is a breach of the covenant, the lender must forfeit before the reporting date of the unit. Otherwise, the debt must be classified as current, even if the waiver is later collected. Government Subsidies

Given the significant impact COVID-19 has had on the economy, governments are responding by providing grants to small businesses to support them financially. Businesses need to evaluate the terms and conditions attached to grants to determine when recognition is appropriate. Government grants become receivable to cover costs or losses incurred or for the purpose of providing immediate financial support to the entity with no associated costs in the future. Futures will be recognized in profit or loss in the period in which it becomes a receivable.

Revenue recognition

An entity that accounts for contracts with customers is covered by IFRS 15, Revenue from customer contracts, only if it is likely that the entity will collect the consideration it would otherwise be entitled to in exchange for goods. or service to customers. In assessing whether the collectability of an amount under consideration is feasible, an entity will consider only the customer's ability and intention to pay the consideration amount when due. Given that COVID-19 has a negative impact on customer credit, organizations should analyze this criterion more closely and gather evidence to support or refute that the collection is may occur at the time the review is due.

In accordance with IFRS 15, consideration of variation is only estimated and included in the transaction price to the extent that it is highly probable that a significant reversal of the accrued revenue recognized when the discrepancy will not occur. certainly involves considering the transform then being resolved. Contract considerations may vary because of discounts, cashback, performance bonuses, and incentives. COVID-19 has resulted in the closure of businesses that produce and deliver non-essential goods and services, and countries encourage citizens to stay home. As a result, demand for non-essential products will decrease and potentially lead to businesses returning large amounts of items to suppliers. Furthermore, the overall decline in economic activity will lead to lower output. As a result, COVID-19 will have a significant impact on estimates of different forms of variation consideration. We anticipate that entities will likely have to recognize a greater return liability and adjust the review to reflect volume incentives and performance rewards that are no longer likely to be met. For organizations that provide warranties to customers, organizations should evaluate the terms and conditions of these warranties and the impact of COVID-19 on warranty terms and deferrals (during warranty cases are separate performance obligations).

Organizations will also need to assess whether termination penalties and the right to pay for performance completed to date are still enforceable. With some companies terminating their contracts and experiencing financial difficulties, the government may pass legislation to support businesses financially and some termination and payment rights may no longer be valid. This can affect the contract duration and revenue recognition model.

Financial risk management presentation

Institutions are required to disclose their level of financial risks, such as credit, liquidity and market risks, and how these risks are being managed. Entities should consider whether COVID-19 affects their risk mitigation plans, such as factoring in accounts receivable and delaying payments to suppliers.

Insurance receivables

Some legal entities may hold coverage for business interruptions or losses. Insurance receivables should be recognized only at the time when it is virtually certain, possibly significantly, after the relevant loss event has occurred. Due to the prevalence of “force majeure” and other similar provisions in insurance policies, we believe that the “almost certain” test is usually met only when the insurer confirms its intention. claim payment. Entities must recognize the proceeds from insurance as other income in the income statement. Other considerations to make

COVID-19 leads to a number of other considerations in the preparation and presentation of financial statements, as follows:

• Relevancy and continuity of hedging accounting as a result of changes in hedging validity requirements or the transaction is no longer highly probable.

• Probability of meeting earnings and volume targets in the measurement of random considerations, discounts, customer incentive payments, and bonuses.

• The ability to meet market-based operating conditions such as share prices in stock-based settlement arrangements.

• Increased volatility for stock options leads to higher fair value and share-based settlement costs. Similarly, canceling an employee's stock option may result in immediate expense recognition.

• Determine the useful life and carrying amount of the asset in accordance with IAS 16.

• Reconsider whether deferred tax assets are entirely realizable, especially if the entity has a net operating loss that is due to expire in the near future.


Mid-year audit report

According to IAS 34, Interim Financial Statements, entities must include disclosures of events and transactions that are material to the understanding of changes in financial position and results of operations. of the entity since the end of the most recent annual reporting period. Therefore, entities should begin or continue to assess the impact of COVID-19 on financial results compared to the year-end report.


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