Accounting Implications of COVID-19
The Covid-19 outbreak was declared a pandemic by the World Health Organisation (WHO) on 11 March 2020. The situation in Australia is rapidly evolving and potential effects of the Covid-19 are difficult to predict.
In this article, we take a brief look at some of the accounting and reporting effects of Covid-19 on Australian businesses.
Implications on Financial Reports
Is the Coronavirus an adjusting or non-adjusting event?
An adjusting event is defined as an event that provides evidence of conditions that existed at the reporting date. A non-adjusting event indicates conditions that arose after the reporting date (AASB 110).
For the reporting period ending 31 December 2019, the Coronavirus is a non-adjusting event, as at that time, only a small number of cases had been reported to the WHO of an unknown virus and there was no explicit evidence of human-to-human transmission. The subsequent spread of the virus and responses to the outbreak arose after the reporting period and therefore no adjustments need to be made to amounts recognised in the 31 December 2019 financial statements.
The AASB 110 requires that an entity should not prepare its financial statements on a going concern basis if events after the reporting period indicate that the going concern assumption is not appropriate. This applies even if those events would otherwise be categorised as non-adjusting events.
Entities should consider whether the events may, individually or collectively, cast significant doubt on the entity’s ability to continue as a going concern and whether the going concern assumption is still an appropriate basis for the preparation of the entity’s financial statements.
If the going concern assumption is not appropriate, the financial statements as at 31 December 2019 would need to be adjusted.
Entities should consider whether the non-adjusting events related to the Coronavirus arising after the reporting date may be material, and thus require disclosure. Entities should consider disclosing the impact of developments after the reporting date on the carrying amount of assets and liabilities or the impact on revenue or borrowing covenants.
Other areas that may be impacted by the Coronavirus include:
- Impairment of non-current assets and goodwill;
- Onerous contract provisions;
- Net realisable value of inventory;
- Expected credit losses;
- Deferred tax assets;
- Cash flow hedge accounting; and,
- Significant judgement and estimates disclosures.
If you require assistance with reporting effects or any of the above mentioned areas, please do not hesitate to get in touch with a lawyer in Coleman Greig’s Litigation & Dispute Resolution team, who would be more than happy to assist.