The impact of coronavirus on financial reporting
In these unprecedented times, financial reporting is probably not at the forefront of most accountants’ minds. However, preparers need to aware of where the coronavirus is having an impact. Steve Collings summarises the main issues practitioners will have to consider.
Companies House filing deadlines
On 11 March 2020, Companies House provided guidance on what to do if a company is unable to file its accounts on time. The advice is to act before the filing deadline.
However, if the company is unable to file on time because it has been affected by the coronavirus, it may make an application to extend the period allowed for filing. If an application for an extension has not been made and the company’s accounts are filed late, an automatic penalty will be applied.
To apply for an extension online you will need:
- The company number
- Information as to why you need more time
- Any documents that support the application.
On receipt of an application as a result of coronavirus, Companies House said it would grant a three-month extension automatically. A further month delay is the maximum allowed under current rules.
Where an application is successful, the entity must file their accounts before the new due date or a late filing penalty will be imposed. It is also worth noting that an accepted application does not change the due dates for future accounts to be sent to Companies House.
The Financial Conduct Authority (FCA) has strongly recommended that all listed companies observe a moratorium on the publication of preliminary financial statements for at least two weeks.
On 21 March 2020, the FCA published a statement which only relates to preliminary results that are due to be published - the moratorium does not extend to all corporate reporting. The moratorium does not cover those entities on the Alternative Investment Market (AIM), it only applies to officially listed companies.
The moratorium is voluntary and has been issued because of the unprecedented events we are currently facing. The FCA is asking companies to observe the moratorium so that they can have regard to recent events. Timetables that were set before the coronavirus took hold may not give companies the necessary time to do this.
The FCA said the practice of issuing preliminary financial statements in advance of the full audited financial statements is adding unnecessary pressure on companies and the auditing profession at the moment.
Disclosing the effects of coronavirus in the financial statements
Companies that have 2019 and 2020 reporting dates will need to consider how the pandemic affects their businesses and consider disclosing the impact in their annual reports.
Where a company has a 31 December 2019 balance sheet date, the effects of coronavirus would generally not be considered as a condition that existed at the reporting date, as the virus itself was only discovered in January 2020.
Where a company has a 31 January 2020 reporting date or subsequent, the effects of the virus could be an adjusting or a non-adjusting event.
Where management concludes that the effect of the virus is a non-adjusting event, then no adjustments are made to the entity’s assets or liabilities. Such a non-adjusting event would, however, need to be disclosed in the financial statements if it is considered material (ie, if non-disclosure would affect the ability of the user to make proper evaluations and/or decisions).
FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, para 32.10 requires the entity to disclose the nature of the event and an estimate of its financial effect, or a statement that such an estimate cannot be made.
Where the virus is considered to be an adjusting event (ie the virus was in existence at the balance sheet date), the directors need to consider the following issues:
- Which assets are likely to be impaired as a consequence of the virus? It might be the case that additional assets will need to be tested for impairment as a result of the virus because they are showing indicators of impairment. Management should consider whether non-financial assets such as property, plant and equipment, intangible assets and goodwill are showing indications of impairment.
- Does the entity need to make additional provisions? For example, have contracts become onerous as a result of the virus?
- Does the entity need to consider writing down financial assets, for example recognising specific bad debts?
- Have any fair values that have been recognised in the financial statements been appropriately determined?
- Are employee benefits affected, such as defined benefit pension schemes and remuneration packages?
- Is the entity a going concern? The pandemic may give rise to the going concern basis of accounting no longer being appropriate hence, under FRS 102, a basis other than the going concern basis of accounting may need to be adopted. Keep in mind that the minimum period of assessment for going concern under UK GAAP is 12 months from the date of approval of the financial statements; not 12 months from the balance sheet date. Where there are material uncertainties related to going concern as a result of the virus, but management concludes the going concern basis of accounting is appropriate, additional disclosures will need to be made. (Small companies choosing to report under FRS 102, Section 1A Small Entities are encouraged to make such disclosures).
- If the entity has received government assistance, how is this to be accounted for in the financial statements? If government assistance meets the definition of a ‘government grant’ then it will need to be accounted for under the provisions of FRS 102, Section 24 Government Grants. For clarity, the definition of ‘government grant’ per the Glossary to FRS 102 is:
|Assistance by government in the form of a transfer of resources to an entity in return for past or future compliance with specified conditions relating to the operating activities of the entity.Government refers to government, government agencies and similar bodies whether local, national or international.|
Anticipate and address problems ahead
The Financial Reporting Council published guidance for auditors last week on the issues they are likely to encounter with the pandemic. Preparers of financial statements at the time, or later in 2020, will need to carefully consider the effects that coronavirus has on the financial statements and consider additional disclosure requirements.
Also, keep in mind Companies House advice to take action concerning any application to extend a filing deadline before the filing deadline passes to protect against a late filing penalty.