Coronaviruses are a family of viruses that can cause illnesses such as the common cold, severe acute respiratory syndrome (SARS) and Middle East respiratory syndrome (MERS). In 2019, a new coronavirus was identified as the cause of a disease outbreak that originated in the city of Wuhan in China. The virus is now known as severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) and the disease it causes is called coronavirus disease 2019 (COVID-19)
The highly pathogenic novel coronavirus has evolved into a global pandemic affecting 195 countries and territories around the world to date, with South Africa’s first confirmed case of COVID-19 having bourgeoned to 402 confirmed cases to date (23 March 2020).
In addition to the rapidly evolving social responses, supply chain disruptions and unavailability of personnel, the COVID-19 disease may impact financial statements significantly in view of financial carnage and market turmoil due to increased volatility in the value of financial instruments. The Johannesburg Stock Exchange (JSE) stocks have plummeted the most since the notorious market crash of October 1997.
Entities’ financial statements and financial reporting should convey all material impacts of the coronavirus, including but not limited to the consideration of accounting conclusions and disclosures. Effective and ethical reporting during ambiguous times should provide users of the financial statements with transparent insights into the applied judgements and financial uncertainties facing entities as a result of the outbreak.
The recognition of revenue is prescribed by International Financial Reporting Standards (IFRS) 15 Revenue from Contracts with Customers. Onerous contracts may arise when the unescapable costs of satisfying contractual obligations exceed the anticipated benefits to be received. Revenue contracts containing penalties for late or non-fulfilment of performance obligations may constitute onerous contracts with intricate accounting implications.
Furthermore, revenue transaction prices may include a notion of variable consideration (contingencies, rebates or return of goods) recorded based on the probability that a significant reversal will not occur upon resolution of the uncertainty. In accordance with IFRS 15 the probability is evidenced by historical models. The validity of these models may nevertheless prove unrealistic pending the global response to the COVID-19 pandemic and the macro implications thereof.
The cancellation of contractual agreements may also result in non-supplies from a value-added tax (VAT) perspective, necessitating a refund of any payments and cancellation of invoices.
Cash flow shortages, costly or delayed procurement, volatility of the stock exchange and unstable trading conditions in the affected regions may influence entities’ financial projections significantly. Revised financial estimates of future earnings may be indicative of the need for potential impairment of non-financial assets. International Accounting Standards (IAS) 36 Impairment of Assets requires entities to conduct an impairment test annually at yearend in event of an impairment indication having arisen.
Amidst the outbreak of COVID-19, certain entities and affected industries such as events, leisure and tourism, may need to conduct impairment assessments of cash generating units in addition to the annual impairment consideration of goodwill and intangible assets with indefinite useful lives.
Discount rates and measurements in accordance with IFRS 13 Fair Value Measurement should reflect the views of market participants and COVID-19 data at the measurement date.
IAS 2 Inventories requires the measurement of inventories at the lower of cost or net realisable value (NRV). However, the determination of NRV may pose troublesome during the COVID-19 economic downturn.
Similarly, entities may need to review the costing of inventories upon abnormal low utilisation of production capacity. The review should ensure that unallocated fixed overhead costs are recognised in the statement of profit or loss as oppose to capitalisation of these overheads against the cost of inventories.
The determination of expected credit losses and collectability of trade receivables impacted by COVID-19 should be considered in terms of IFRS 9 Financial Instruments. The amount and timing must be based on the reasonable and supportable evidence available at the end of the reporting period without the utilisation of hindsight.
Proportionately to the outbreak of COVID-19 entities may be considering business closures, downsizing or geographic restructurings with potential accounting implications aligning with IFRS 5 Non-current Assets held for Sale and Discontinued Operations.
The pandemic may leave multinational entities with substantial tax burdens if not managed appropriately. Entities may need to re-evaluate their multinational transfer price planning. It is recommended that they review their existing intergroup arrangements to consider whether these agreements allow for economic modifications between related parties contingent upon business disruption.
Cross-border employees may experience potential employment tax issues. The severity thereof hinges on the length of time that cross-border employees work in specific countries and the governance of taxation within the relevant jurisdictions concerned.
Persistent market mayhem and an increased inability to amortise loans may result in a breach of debt covenants that may impact the timing of loan repayments − therefore, directly impacting the classification of non-current and current liabilities on the face of the statement of financial position.
Amendments to loan agreements may merit multi-faceted accounting considerations.
Any material breach of loan covenants, beyond the reporting date, may constitute a non-adjusting subsequent event in terms of IAS10 Events after the Reporting Period. Furthermore, such a material breach may impact the appropriateness of the application of the going concern assumption.
Amounts recorded for reporting periods ending on or before 31 December 2019 would not necessarily be affected but may require definite disclosure. With regard to reporting periods ending subsequent to 31 December 2019, COVID-19 may affect the recognition and measurement of assets and liabilities in the financial statements.
The brunt of COVID-19 on the global economy, financial markets and world health is anticipated to evolve dramatically. Entities should consider interrelated accounting conclusions and the appropriate disclosure of COVID-19 as a key audit matter.
Technical requirements
Business Live 2020, JSE to contend with Asian markets, viewed 16 March 2020, available at https://www.businesslive.co.za/bd/markets/2020-03-11-jse-to-contend-with-mixed-asian-markets-on-wednesday/.
Deloitte 2020, Accounting considerations related to COVID-19, viewed 16 March 2020, available at https://www2.deloitte.com/ng/en/pages/audit/articles/accounting-considerations-related-COVID19.html?id=ng:2sm:3fb:4COVID-19::6adv:20200317134302::3205615254&utm_source=fb&utm_campaign=COVID-19&utm_content=adv&utm_medium=social&linkId=84484225.
Inform.pwc.com 2020, Inventories (IAS 2), viewed 16 March 2020, available at https://inform.pwc.com/inform2/show?action=informContent&id=0948085303162320.
Iasplus.com 2020, IAS 36 Impairment off Assets, viewed 16 March 2020, available at http://www.iasplus.com/en/standards/ias/ias36.
Iasplus.com 2020, IFRS 5 Non-current Assets held for Sale and Discontinued Operations, viewed 16 March 2020, available at https://www.iasplus.com/en/standards/ifrs/ifrs5.
Iasplus.com 2020, IFRS 9 Financial Instruments, viewed 16 March 2020, available at https://www.iasplus.com/en/standards/ifrs/ifrs9.
Iasplus.com 2020, IFRS 13 Fair Value Measurement, viewed 16 March, available at: <https://www.iasplus.com/en/standards/ifrs/ifrs13.
Iasplus.com 2020, IFRS 15 Revenue from Contracts with Customers, viewed 16 March 2020, available at https://www.iasplus.com/en/standards/ifrs/ifrs15.
ICAEW 2020, Coronavirus guidance, viewed 16 March 2020, available at: https://www.icaew.com/technical/audit-and-assurance/audit/group-audit/coronavirus-guidance
https://www.who.int/health-topics/coronavirus.
AUTHOR | Michelle Coetzee (formerly van Rooyen) CA(SA), Auditing and Taxation Lecturer at Akademia, michellevr@akademia.ac.za
