Implications of COVID-19 for the preparation of accounts under FRS 102

The coronavirus pandemic has had a major impact on businesses but how will it affect the preparation of your accounts? We look at some of the areas that will need consideration below.

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

A fundamental principle when preparing 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 that 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 in notes to the accounts when they are material.

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, but not limited to, 12 months from the date when the financial statements are authorised for issue. The impact of COVID-19 must therefore be reflected in the going concern assessment for all accounts not yet authorised for issue.

To what extent are tangible and intangible assets impaired?

When assessing the carrying value of tangible and intangible assets, the assessment must be based on conditions and impairment indicators that existed at the balance sheet date.

Will stock be sold for at least its carrying value?

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. This will be particularly relevant when stock has a short shelf life or when there is likely to be a long-term reduction in demand for the product.

Is there objective evidence that debtors are not recoverable?

When there is objective evidence that debtors were not recoverable as at the balance sheet date they must be written down immediately: for example if there is evidence that the debtor is in significant financial difficulty and/or there has been a failure to pay debts when due.

Have any existing contracts become onerous?

Some contracts that may have previously been considered profitable (or break-even) may now be considered onerous e.g., operating leases for retail space. A provision will be required for any present obligation at the balance sheet date.

Are there any restructuring plans?

Many businesses will be reviewing their operations, for example reducing staffing levels, mothballing certain activities or selling some of the company’s assets. A restructuring provision must be recognised only to the extent that there is a constructive obligation at the balance sheet date.

Will any losses be covered by insurance policies?

Insurance recoveries should be recognised only when virtually certain.

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.

Have contracts with employees been modified or terminated?

If contracts have been modified or terminated this may have implications for the amount recognised as employment costs to the entity. There may be additional holiday pay accruals for employees who have been permitted to carry forward statutory annual leave not taken due to COVID-19.

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, grants for certain sectors and government-backed loan arrangements. Government grants may not be recognised until there is reasonable assurance that the entity will (a) comply with the conditions attaching to them and (b) the grants will be received.

COVID-19-related rent concessions

When rent concessions have been granted as a direct consequence of COVID-19, a lessee (or lessor) should recognise any change in the operating lease payments (or income) on a systematic basis over the periods that the change impacts.

Are there implications for deferred tax?

Deferred tax assets must be recognised only to the extent that it is probable that they will be recovered against the reversal of deferred tax liabilities or other future taxable profits.

What needs to be disclosed?

Disclosure requirements vary according to the size of entity and whether or not it applies FRS 102 Section 1A for Small Entities. However, all accounts are required to give a true and fair view. In these times of significant uncertainty it has never been more important to be transparent about risks faced and the assumptions used, and making the disclosures as specific to the business as possible.

Dividends and other distributions

Directors will need to consider whether they can lawfully pay dividends and, if they can, whether they ought to do so.

Anything else?

Each entity will need to consider its business, the transactions and contracts it has entered into, the environment in which it operates and what might be considered material to its users when determining the impact of COVID-19 on the financial statements.

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