The spread of the Coronavirus is impacting businesses around the world. Entities need to carefully consider the accounting implications of this situation. This MFRS Alert considers the impact of the Coronavirus on 31 December 2019 year ends.
As Coronavirus is becoming more widespread, it is important that businesses consider the accounting implications as a result of the impact it is having on their business.
Is the impact of the Coronavirus an adjusting event in the 31 December 2019 year-end financial statements?
Entities should consider MFRS 110 ‘Events after the reporting period’ to determine if the impact of the coronavirus is an adjusting event or a non-adjusting event.
MFRS 110 describes an adjusting event as one which ‘provides evidence of conditions that existed at the end of the reporting period’. In our view, the development and spread of this virus happened in 2020 and does not provide evidence of a condition that existed at 31 December 2019 and therefore is a non-adjusting event. At 31 December 2019 there were few reported cases and little confirmed evidence of its spread amongst humans.
Therefore the impact of balances should be largely unaffected until quarter one of 2020. Entities need to ensure the measurement of their assets and liabilities at 31 December 2019 is not impacted by subsequent development of the virus. For example, measurement of expected credit losses and hedge effectiveness in accordance with MFRS 9 ‘Financial Instruments’, measurement of impairment intangible assets such as goodwill under MFRS 136 ‘Impairment’ and assets and liabilities that are measured at fair value in accordance with MFRS 13 ‘Fair Value Measurement’. Also consider MFRS 102 ‘Inventories’ because if your client has reduced or idle capacity, their overhead costs may not be allocated to inventory as they usually are and the realisation of deferred tax assets under MFRS 112 ‘Income Taxes’ should also be considered.
If the impact of the non-adjusting event is material to the financial statements, it should be disclosed. This disclosure should include the nature of the event and an estimate of the financial effect, or it is not possible to estimate this, a statement to that effect.