Implications of COVID 19 on the preparation and audit of accounts

The coronavirus pandemic continues to have a major impact on businesses, but the extent to which this affects entities’ accounts, in terms of both measurement and disclosure, will depend on the particular facts and circumstances of each entity. In this article we explore some of the factors that we will need to consider when we are preparing and auditing your accounts.

What are the conditions that existed at the balance sheet date?

A fundamental principle in the preparation of accounts is that they should reflect the conditions that existed at the balance sheet date.

Information which comes to light after the balance sheet date, which provides evidence of conditions that existed at the balance sheet date, should be reflected in amounts recognised in the accounts. Information indicative of conditions that arose after the balance sheet date should be disclosed only when material, but does not affect the measurement of amounts at the balance sheet date, unless the business has ceased to be a going concern (see below).

In a rapidly-evolving situation, this will involve a significant amount of judgement.

Is the business a going concern?

An entity is a going concern unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. When assessing whether the going concern basis of accounting is appropriate, management must take into account all of the available information about the future which is at least 12 months from the date when the financial statements are authorised for issue.

How will going concern be assessed?

The assessment of management of whether an entity has the ability to continue as a going concern is likely to be the most significant judgement to be made in the current climate.  As auditors we will need (and will be expected) to challenge management’s assessment and all the assumptions made in compilation of forecasts.  All previous forecasts will need to be revisited, and these may even require continuous reassessment as conditions change. 

To what extent are tangible and intangible assets, stocks or debtors impaired? 

COVID-19 means that many businesses are not able to operate as normal. This, combined with the negative impact on the economy more generally, is likely to indicate impairment in the value of assets (to the extent these conditions existed at the balance sheet date). In such circumstances, the entity will need to assess the recoverable amounts of the assets affected.

Even when assets are not considered to be impaired, residual values and useful economic lives may still require reassessment.

Stock will need to be written down when the estimated selling price (less costs to complete and sell) is less than its carrying value, based on the conditions which existed at the balance sheet date.

Debtors that were not recoverable at the balance sheet date, must be written down immediately, for example there is evidence of significant financial difficulty of the debtor and/or a failure to pay debts when due. Adverse market or economic conditions can also be evidence of impairment. If debts have been renegotiated, reclassification or remeasurement may be required to reflect the new contract terms.

Have any existing contracts become onerous?

Some contracts that may have previously been considered profitable (or break-even) could now be considered onerous, for example operating leases for a vehicle fleet, restaurants or retail space.

Have bank and other loans been renegotiated? Have covenants been breached?

Bank and other loans may require reclassification or remeasurement if terms have been breached or renegotiated at the balance sheet date, for example transfer from non-current to current liabilities or recalculation of implicit rates of interest.

What has been received by way of government assistance?

The government has introduced a range of initiatives to help businesses including the Coronavirus Job Retention Scheme, business rates holidays and grants for certain sectors. Government grants may not be recognised until there is reasonable assurance that the entity will comply with the conditions attaching to them and the grants will be received.

What needs to be disclosed?

Disclosure requirements vary according to the size of entity. However, all accounts are required to give a true and fair view.  Disclosures will be necessary for key judgements in applying accounting policies, new accounting policies, such as government grants, and key sources of estimation uncertainty, in order to meet the objective of giving a true and fair view.

In these times of significant uncertainty, it has never been more important to be transparent about the risks faced and the assumptions used, and in making the disclosures as specific to the business as possible. 

Call Now Button