Supporting International Standards
Summary of Covid-19 Financial Reporting Considerations
Christopher Arnold, Stathis Gould | June 3, 2020
The magnitude of disruption from the Covid-19 pandemic has significantly impacted organizations of all sizes, across all industry sectors. Management and those charged with governance (TCWG) are having to make difficult decisions daily about operational, financial, and strategic matters.
The consequences on financial statement reporting and audit engagements are complex. There is an unprecedented level of uncertainty about the economy, future earnings and many other inputs that represent fundamental elements of financial reporting. There will be multiple financial reporting implications to be considered by preparers of financial statements for the purposes of reporting in the short and potentially medium term.
The responsibility for preparing and overseeing financial reporting is with management, with oversight from TCWG. They will have to exercise significant judgment in the current business environment. Of particular importance is:
- Balancing the timeliness of reporting against the reliability and integrity of reported information that appropriately incorporates managements best judgments and estimates.
- Appropriately assessing going concern and disclosures of substantial doubt/ material uncertainty when it exists.
- Providing a fair view and presentation of the performance and position of the entity, which is likely to require comprehensive disclosure of forward-looking information and cash flow impacts.
- Maintaining an environment of integrity and transparency as the basis for trustworthy and ethical decision-making across the organization
- Ensuring effective internal controls over financial reporting and emerging risks and taking advantage of extended reporting deadlines, as needed.
This web page covers many of the key financial reporting challenges and implications from Covid-19 and highlights various resources which are available on the dedicated IFAC Covid-19 website. References and quotes are given from numerous international standards. Not all aspects of those international standards are discussed – as such, readers should refer to those international standards for all the requirements. There may be differences in approach depending on whether financial statements are prepared using IFRS or national GAAP.
Professional accountants must remain focused on their ethical responsibilities and on the public interest. It is important for them to exercise heightened diligence and professional judgment to combat higher risks of financial misrepresentation and fraud, and to ensure government and other assistance is used appropriately. The application of the IESBA International Code of Ethics for Professional Accountants (including International Independence Standards), including compliance with the fundamental principles (integrity, objectivity, professional competence and due care, confidentiality and professional behavior) is key to preservation and expansion of public trust in all professional accountants .
Professional accountants will be asked to produce, analyze, and deliver the information upon which critical decisions will be made. The Code requires that in preparing or presenting information, professional accountants do so in a manner that is intended neither to mislead nor to influence contractual or regulatory outcomes inappropriately. The Code also requires professional accountants to exercise professional judgment to represent the facts accurately and completely in all material respects; describe clearly the true nature of business transactions or activities; and classify and record information in a timely and proper manner.
Click on the topic area below to expand the content and related resources:
- Going Concern
IAS 1 Presentation of Financial Statements requires management to assess a company’s ability to continue as a going concern. The going concern assessment needs to be performed up to the date on which the financial statements are issued. There may be significant areas of uncertainty due to Covid-19 and it could be important to assess the impact of new information which only becomes available closer to the approval date. The assessment relates to at least the first twelve months after the balance sheet date, or after the date the financial statements will be signed, but the timeframe might need to be extended.
Material uncertainties that cast significant doubt on the company’s ability to operate under the going concern basis need to be disclosed in the financial statements. It is highly likely that many companies large and small, and particularly in certain sectors, will have issues relating to the current situation that need to be considered by management and TCWG. There will be a wide range of factors to take into account in going concern judgments and financial projections including travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of suppliers and customers and their effect on expected profitability and other key financial performance ratios including information that shows whether there will be sufficient liquidity to continue to meet obligations when they are due.
Given the significant uncertainty, disclosure should include those significant assumptions and judgments applied in making going concern assessments. Assessments will likely need to include different scenarios with varying assumptions, including different timelines for lifting restrictions, which can be updated to take into account the evolving nature of uncertainties. Frequent stress testing of projections and identifying factors that would make a business model unworkable are considered good practices.
Management should assess the existing and anticipated effects of Covid-19 on the company’s activities and the appropriateness of the use of the going concern basis. If it is decided to either liquidate or to cease trading, or the company has no realistic alternative but to do so it is no longer a going concern and the financial statements may have to be prepared on another basis, such as a liquidation basis.
Going Concern Resources
- Center for Audit Quality (CAQ) Going Concern: Management and Auditor Responsibilities
- Deloitte IAS 1 — Presentation of Financial Statements
- IAASB Staff Alert Going Concern in the Current Evolving Environment―Audit Considerations for the Impact of COVID-19
- ICAEW Coronavirus, going concern and the auditor’s report
- ICAEW Covid-19 and Going Concern – Guidance for Directors of SME Businesses
- IFRS IAS 1 Presentation of Financial Statements
- KPMG What are the relevant going concern considerations?
- Journal of Accountancy Going concern tips for auditors during the pandemic
- SAICA Application of IFRS Standards in light of the Corona Virus Disease (COVID-19) Uncertainty - Disclosure of judgements and sources of estimation uncertainty
- Events After the Reporting Period
IAS 10 Events After the Reporting Period contains requirements for when adjusting events (those that provide evidence of conditions that existed at the end of the reporting period) and non-adjusting events (those that are indicative of conditions that arose after the reporting period) need to be reflected in the financial statements. Amounts recognized in the financial statements are adjusted to reflect adjusting events, but only disclosures are required for material non-adjusting events.
Judgment is required in determining whether events that took place after the end of the reporting period are adjusting or non-adjusting events. This will be highly dependent on the reporting date and the specific facts and circumstances of each company’s operations and value chain. Management may need to continually review and update the assessments up to the date the financial statements are issued given the fluid nature of the crisis and the uncertainties involved.
With respect to reporting periods ending on or before 31 December 2019, there is a general consensus that the effects of the COVID-19 outbreak are the result of events that arose after the reporting date (e.g., in the UK, the Financial Reporting Council has stated that COVID-19 in 2020 was a non-adjusting event for the vast majority of UK companies preparing financial statements for periods ended 31 December 2019). For later reporting dates (e.g. February or March 2020 year ends), it is likely to be a current-period event which will require ongoing evaluation to determine the extent to which developments after the reporting date should be recognized in the reporting period.
If management concludes the impact of non-adjusting events are material, the company is required to disclose the nature of the event and an estimate of its financial effect. If it cannot be reliably quantitively estimated, there still needs to be a qualitative disclosure, including a statement that it is not possible to estimate the effect. Management should also consider whether it is able to properly assess going concern, in the event that it can not reliably quantify the affect of non-adjusting events.
Examples of non-adjusting events that would generally be disclosed in the financial statements include breaches of loan covenants, management plans to discontinue an operation or implement a major restructuring, significant declines in the fair value of investments held and abnormally large changes in asset prices, after the reporting period.
Events After the Reporting Period Resources
- Deloitte IAS 10 — Events After the Reporting Period
- Financial Reporting Council (FRC) COVID-19 Response
- IFRS IAS 10 Events after the Reporting Period
- KPMG How should companies assess COVID-19 events after the reporting date
- Fair Value Measurement and Impairment of Non-Financial Assets
A change in the fair value measurement affects the disclosures required by IFRS 13, Fair Value Measurement, which requires companies to disclose the valuation techniques and the inputs used in the FVM as well as the sensitivity of the valuation to changes in assumptions. Disclosures are needed to enable users to understand whether Covid-19 has been considered for the purpose of FVM. A key question is what conditions and the corresponding assumptions were known or knowable to market participants at the reporting date.
For 2020, fair value measurements, particularly of financial instruments and investment property, will need to be reviewed to ensure the values reflect the conditions at the balance sheet date. This will involve measurement based on unobservable inputs that reflect how market participants would consider the effect of Covid-19 in their expectations of future cash flows related to the asset or liability at the reporting date.
During the current environment, the volatility of prices on various markets has also increased. This affects the FVM either directly - if fair value is determined based on market prices (for example, in case of shares or debt securities traded on an active market), or indirectly - for example, if a valuation technique is based on inputs that are derived from volatile markets. Consequently, special attention will be needed on the commodity price forecasting that is used in developing fair value conclusions.
Impairment of Non-Financial Assets
IAS 36, Impairment of Assets ensures that a company’s assets are carried at not more than their recoverable amount (the higher of fair value less costs of disposal and value in use) and requires companies to conduct impairment tests when there is an indication of impairment of an asset at the reporting date. Indicators of impairment include significant changes with an adverse effect on the company that have taken place during the reporting period or will take place soon in the market or economic environment in which the company operates.
The scope of assets subject to the requirements in IAS 36 is broad. It includes property, plant and equipment (carried at cost or revalued amount), intangible assets (carried at cost or revalued amount), goodwill, right‑of‑use assets (if carried at cost), investment property (if carried at cost), biological assets (if carried at cost) and investments in associates and joint ventures accounted for using the equity method.
Companies will need to assess whether the impact of Covid-19 has potentially led to an asset impairment. For most companies, the economic effects are likely to trigger an impairment test for long-lived assets and other asset groups. Estimates of future cash flows and earnings are likely to be significantly affected by direct or indirect impacts. Asset impairment may also reduce the amount of deferred tax liabilities. Management may need to make estimates about expected timing of reversal of the deductible and taxable temporary differences when considering whether a deferred tax asset can be recognized. Ongoing identification and evaluation and re-evaluation are essential to understand the extent of the need for recognition and for what periods.
Valuation of inventories is subject to IAS 2 Inventories - requiring measurement at the lower of their cost and net realizable value (NRV). In the current environment, the NRV calculation will likely require more detailed methods or assumptions (e.g. companies may need to write-down stock due to less sales). Interim inventory impairment losses should be reflected in the interim period in which they occur, with subsequent recoveries recognized as gains in future periods.
Areas where additional judgment is needed to evaluate fair value measurement and value in use projections include:
- When entities have difficulty incorporating uncertainties in future cash flows for value in use. The question arises whether uncertainty can be incorporated by adjusting the discount rate instead. For some entities, uncertainty about the future may mean that it is challenging to forecast more than one set of cash flows. In this case, a sensitivity analysis may be achieved using a range of discount rates together with estimates of the timing of economic recovery.
- It is difficult to obtain a meaningful baseline economic forecast to develop estimated future cash flow scenarios that are the basis for fair values, including further plausible downside economic scenarios specific to the entity.
- Determining key inputs and assumptions, such as:
- Timing of economic recovery.
- Shape of projected GDP growth — V, U, or W shape (W shape takes into account second or third lockdown periods, which are uncertain).
- Forecast period before there is a “new normal” which will be more challenging in some industries (e.g., travel, leisure, and hospitality).
There is a need for clear and transparent disclosures by companies on how fair value measurement and value in use have been determined, including key inputs and assumptions as well as disclosures of significant non-adjusting post balance sheet events.
Fair Value Measurement and Impairment of Non-Financial Assets Resources
- BDO Potential effects of the coronavirus outbreak on 31 December 2019 Year End Financial Reporting
- Deloitte What is the potential impact of Covid-19 on your portfolio valuations?
- IASB IFRS 13, Fair Value Measurement
- IASB IAS 36, Impairment of Assets
- IASB IAS 2 Inventories
- ICAEW Impairment of Assets in the Context of COVID-19
- IDW Effects of the coronavirus pandemic on impairment of financial instruments according to IFRS 9 in the quarterly financial statements of banks as of 31 March 2020
- Grant Thornton Impairment of intangible assets and goodwill
- KPMG Are fair values appropriately determined?
- KPMG Have non-financial assets become impaired – e.g. PPE, intangible assets and goodwill?
- KPMG Are fair values appropriately determined?
- PWC FAQ on accounting for COVID-19 and market volatility (updated May 12, 2020)
- Expected Credit Losses for Financial Assets
The Covid-19 impact on credit risk will be more severe and immediate in various sectors. The IASB has published a document responding to questions regarding the application of IFRS 9, Financial Instruments which requires companies to incorporate reasonable and supportable information about past events, current conditions and the forecast of future economic conditions into the assessment of Expected Credit Losses (ECLs) for financial assets not measured at fair value through profit or loss. Such an assessment should be based on information at the reporting date. Events after the reporting date should be considered for whether they provide additional evidence on the information already existent as at the reporting date.
The increased credit risk faced by banks and lenders is related to exposures to borrowers in highly affected sectors. Provisions need to be estimated based on the ECL for the entire remaining life of a financial instrument, such as loans to borrowers whose credit risk has increased significantly since origination.
The European Central Bank (ECB), European Banking Authority (EBA), European Securities and Markets Authority (ESMA), and Prudential Regulation Authority (PRA) at the Bank of England have issued public statements with reminders about IFRS 9 and its application in the current environment. The U.S. government has also offered voluntary relief for banks on the application of the new U.S. GAAP CECL model through the CARES Act.
ECL is a probability weighted amount that is determined by evaluating a range of possible outcomes. Qualitative and quantitative disclosure enables users of financial statements to understand the effect of credit risk on the amount, timing, and uncertainty of future cash flows. This includes the basis of inputs and use of assumptions and estimation techniques. The measurement of ECL applies to companies across industries other than financial services, but specific considerations and ECL guidance for lenders and banks is available.
Covid-19 impact and challenges include:
- Judgment will potentially have a big impact on the numbers. There is a need for clear and transparent disclosures around judgments, assumptions, and sensitivities.
- The design and calibration of ECL models were not set in contemplation of current circumstances and were often based on historic data sets from the past five to ten years (e.g., models can automatically assume a significant increase in credit risk (SICR) in the event of a payment holiday (forbearance) or covenant breaches, whereas currently these events do not necessarily result in a SICR. Adjustments to the amounts generated by models are needed to reflect the new environment, including the anticipated short-term nature of an economic downturn (in comparison with the longer-term nature of many financial assets) and significant government support.
- Difficulties in determining which borrowers experience short-term liquidity challenges versus more fundamental solvency constraints have a direct impact on the amount of ECL (i.e., 12-month losses versus lifetime losses).
- Key inputs and assumptions, such as:
- SICR or staging criteria under IFRS 9.
- Forecasts of multiple economic scenarios and weightings.
- Effect of payment holidays on staging as well as on measurement of related loan balances.
- Data, models, and simplification issues/post model adjustments to capture the impact of the current unprecedented circumstances that are not reflected in the historical relationships underpinning the ECL models.
- Consistency and clarity of disclosures, including interim disclosures.
Expected Credit Losses for Financial Assets Resources
- Bank of England Prudential Regulation Authority (PRA) Covid-19: IFRS 9, capital requirements and loan covenants
- Deloitte IFRS in Focus — Expected credit loss accounting considerations related to Coronavirus Disease 2019
- European Central Bank IFRS 9 in the context of the coronavirus (COVID-19) pandemic
- European Banking Authority Statement on the application of the prudential framework regarding Default, Forbearance and IFRS9 in light of COVID19 measures
- ESMA Public Statement ‘Accounting implications of the COVID-19 outbreak on the calculation of expected credit losses in accordance with IFRS 9’
- IASB, IFRS 9, Financial Instruments
- IASB IFRS 9 and covid-19—accounting for expected credit losses
- KPMG Financial Reporting Hot Topics: Coronavirus (Thoughts on Financial Instrument Accounting)
- Mazars: Webinar Impact of Latest Covid-19 publications on banks’ ECL under IFRS 9
- Lease Accounting
The objective of IFRS 16, Leases is to report information that faithfully represents lease transactions and provides a basis for users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
Lessees are required to recognize assets and liabilities arising from all leases unless the lease term is 12 months or less or the underlying asset has a low value. Lessors classify leases as an operating lease or a finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Otherwise a lease is classified as an operating lease.
In the current environment, lessees may be seeking rent concessions from lessors. This may take the form of reduced or free rent for a period, a deferral of rent or some other type of relief (e.g. fixed rent payments becoming variable). The accounting implications of an agreed change to rent will depend on whether the change was envisaged in the original lease agreement.
The IASB has issued an amendment to IFRS 16 to make it easier for lessees to account for Covid-19 related rent concessions. The changes:
- Provide lessees with an exemption from assessing whether a Covid-19 related rent concession is a lease modification.
- Requires lessees that apply the exemption to account for Covid-19 related rent concessions as if they were not lease modifications and to disclose the fact if the exemption is applied.
- Requires lessees to apply the exemption retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors but not require them to restate prior period figures.
The amendment is effective June 1, 2020, but lessees can apply the amendment immediately in any financial statements (interim or annual) not yet authorized for issue.
The FASB (through Staff Q&A) addressed certain challenges for lessors and lessees by permitting payment holidays/deferrals arising as a result of COVID-19 not to be considered a lease modification.
In many geographies, IFRS is subject to an endorsement process before becoming a part of the accounting framework (e.g., EU endorsement). This often takes a significant amount of time. If the anticipated amendments to IFRS 16 are not endorsed in a particular geography in time for them to be implemented before the 30 June 2020 period ends, challenges noted below will apply:
- A large number of contracts may need to be analyzed in a short period of time to assess whether the concessions or relief constitute lease modifications or changes in variable lease payments. This is a more pervasive issue for retailers and sectors that use equipment, such as airline and extractive companies. The current wording of IFRS 16 was not designed for the circumstances we are in now. Lease modification accounting may lead to:
- Significant balance sheet adjustments and benefit from the lease concession spread over the remainder of the lease term.
- Potential impairment issues if the new discount rate is lower and resulting lease liability is remeasured (higher) with an associated adjustment being made to the right-of-use asset (right-of-use asset balance potentially cannot be recovered).
Certain of the amendments noted above result in a number of different approaches being permitted when accounting for the effects of lease payment holidays or deferrals. There is a need for clear and transparent disclosures about the approach that has been followed and its related impact.
Lease Accounting Resources
- IASB IFRS 16 Leases
- IASB IFRS 16 and Covid-19
- IASB IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
- Grant Thornton Accounting for rent concessions
- IFRS Foundation Application of IFRS 16 in light of the covid-19 uncertainty
- FASB Q&A Accounting for Lease Concessions Related to the Effects of the Covid-19 Pandemic
- KPMG Have lease assets become impaired?
- Hedge Accounting
Covid-19 may reduce the probability of a hedged forecast transaction occurring or affect its timing. Consequently, the hedge accounting criteria in applicable financial reporting standards may no longer be met, for example if a hedged financial asset becomes credit impaired.
If a hedged forecast transaction is no longer highly probable to occur, hedge accounting is discontinued and the accumulated gains or losses on the hedging instrument need to be reclassified to profit or loss. Significant amounts may be recorded in the profit or loss account as a result of failing hedge accounting criteria.
Hedged items that could be affected due to Covid-19 include: Sale or purchase volumes that fall below the levels originally forecasted; planned debt issuances that are delayed or cancelled such that interest payments fall below levels originally forecasted; business acquisitions or disposals that are delayed or cancelled.
There is a need for clear and transparent disclosures by companies about the use of hedge accounting, the effects of current and expected future conditions and amounts reported in the profit and loss account. For example, IFRS 7, Financial Instruments: Disclosures requires disclosure of defaults and breaches of loans payable, of gains and losses arising from derecognition or modification, and of any reclassification from the cash flow hedge reserve that results from hedged future cash flows no longer being expected to occur. Disclosures include quantitative data, for example about liquidity risk, and narrative disclosure, for example how risk is being managed.
Hedge Accounting Resources
- Deferred Tax Assets/ Government Support
IAS 12, Income Taxes deals with the accounting treatment for income taxes. It requires an entity to recognize a deferred tax liability or (subject to specified conditions) a deferred tax asset for all temporary differences, with some exceptions. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
There may be still be uncertainties at the year-end in estimating whether there will be sufficient future taxable profits against which to utilize the historic tax losses and this uncertainty will require the need for judgment when calculating deferred tax asset balances.
Covid-19 has prompted various forms of government relief programs. In general, government support can be split into two types — changes in tax laws vs. direct assistance via government grants or loans. In accordance with IAS 20, Accounting for Government Grants and Disclosure of Government Assistance there will be different accounting treatments for government funding depending on whether it is received through a tax concession or a government grant.
Government support often may be conditional on companies complying with specified conditions (e.g., retain 90 percent of employees on payroll). Professional accountants are required to understand and comply with any new laws or regulations introduced in response to the pandemic, as might apply to their particular circumstances. It is also important they uphold the profession’s responsibility to act in the public interest, for example, ensuring government and other assistance is used appropriately.
If the Government support is through income tax laws, the timing of recognition would depend on timing of enactment of the law. In accordance with IAS 12, deferred tax assets are measured at the tax rates that are expected to apply to the period when the asset is realized based on tax rates/ laws that have been enacted or substantively enacted by the end of the reporting period (similar to deferred tax liabilities and current tax). If the support is through a government grant, recognition is based upon reasonable assurance that entity will comply, and the grant will be received.
Clear and transparent disclosures by entities about government support, both for amounts already obtained and in the future, together with assessments of compliance with conditions is helpful to users in understanding other aspects of financial reporting, such as the basis of going concern.
In accordance with IAS 12, the carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available.
Covid-19 may impact projections of future taxable profits (some may reduce while others increase) and will be affected by various factors, such as:
- Changes in cashflow forecasts.
- Modifications in the company tax strategy.
- Changes in tax law due to government intervention measures (e.g. an extended period to use tax losses carried forward).
In addition, some of the changes may impact the timing of the reversal of temporary differences.
Deferred Tax Assets/ Government Support Resources
- Revenue Recognition
IFRS 15, Revenue from Contracts with Customers establishes the principles that an entity applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer.
In accordance with IFRS 15, an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity applies five steps:
- Identify the contract(s) with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognize revenue when (or as) the entity satisfies a performance obligation
Covid-19 could affect the assumptions made by management in measuring the revenue from goods or services already delivered, particularly for variable consideration and for the anticipated outcome of contacts extending over multiple reporting periods.
For example, reduced demand could lead to an increase in expected returns, additional price concessions, reduced volume discounts, penalties for late delivery or a reduction in the prices that can be obtained by a customer. A company may also modify its enforceable rights or obligations under a contract with a customer such as granting a price concession in which is it is necessary to consider whether the concession is due to the resolution of variability that existed at contract inception or a modification that changes the parties’ rights and obligations.
FASB has voted to extend by one year the effective date of its revenue recognition standard to all private companies and private not-for-profit entities that have not yet issued their financial statements. The effective date will be for fiscal years beginning after December 15, 2021.
Revenue Recognition Resources
- BDO Coronavirus impacts on the accounting for financial instruments under IFRS 9 and contract assets under IFRS 15
- IASB IFRS 15 Revenue from Contracts with Customers
- KPMG Are customer contracts still enforceable?
- SAICA Application of IFRS Standards in light of the Coronavirus Disease (COVID-19) Uncertainty - IFRS 15 Revenue from Contracts with Customers
- Interim Financial Reporting
Interim Financial Reporting
An interim financial report is a complete or condensed set of financial statements for a period shorter than a financial year. Interim reporting will be of interest to various users who may been keen to understand how COVID-19 has, and will, affect companies and industry sectors.
The IOSCO Statement on the Importance of Disclosure about COVID-19 (May 2020) included “…interim financial reporting is intended to provide an update focusing on changes in the entity’s financial position and results of operations since the last annual period. In the current environment, many issuers will find that circumstances have changed significantly which will require more robust disclosures of material information and management’s response to the changing circumstances.”
Requirements for the preparation of, and assurance on, interim reports vary across jurisdictions. This means there are significant differences in interim reporting frameworks and different levels of auditor involvement and reporting. For example, some require quarterly reporting, and others half yearly. Some require the application of a specified financial reporting framework. In addition, in some geographies, no assurance is required on interim reports.
The Applicable Financial Reporting Framework
The applicable financial reporting framework used by the entity to prepare the interim financial information may be specified in jurisdictional law or regulation, securities regulation, stock exchange rules or national standards, or if not specified, management of the entity may choose the financial reporting framework
In addition, the entity may have multiple options in applying the applicable financial reporting framework, including deciding whether to provide a comprehensive set of interim financial statements or condensed set of interim financial statements (which focus on changes from the last annual period).
The applicable financial reporting framework used to prepare the interim financial information will likely differ from the applicable financial reporting framework used to prepare the annual financial statements. In particular:
- The disclosures required by the applicable financial reporting framework for interim financial information may be more limited than for annual financial statements.
- The applicable financial reporting framework used to prepare the interim financial information may be a “compliance framework,” while the applicable financial reporting framework used to prepare the annual financial statements may be a “fair presentation framework.”
In response to the COVID-19 pandemic, jurisdictional law or regulation, securities regulation, stock exchange rules or standard setting bodies may:
- Have amended the financial reporting framework. For example, in May 2020, the International Accounting Standards Board (IASB) issued Covid-19-Related Rent Concessions, which amended IFRS 16, Leases (see Section on Lease Accounting here).
- Permit or require departures from the requirements of the financial reporting framework in preparing the interim financial information for current periods. For example, law or regulation or stock exchange rules may require or permit entities not to account for, or disclose the effects of, the COVID-19 pandemic on certain aspects of the interim financial statements. However, those departures from the requirements of the financial reporting framework may result in the interim financial information failing to provide a fair presentation.
Fair Presentation Framework Compared to a Compliance Framework
A fair presentation framework acknowledges, explicitly or implicitly, that to achieve fair presentation of the financial statements, it may be necessary for management to:
- Provide disclosures beyond those specifically required by the framework; or
- Depart from a requirement of the framework to achieve fair presentation (extremely rare).
A compliance framework requires compliance with the requirements of the framework, but it does not require additional disclosures beyond the framework or permit departure from the framework.
A commonly used fair presentation framework is the International Accounting Standards Board’s (IASB) International Accounting Standard (IAS) 34, Interim Financial Reporting. Without mandating when an entity should prepare such a report, IAS 34 permits less information to be reported than in annual financial statements (on the basis of providing an update to those financial statements) and specifies minimum components to be reported; condensed primary statements and certain explanatory notes. Additional line-items or notes are required to be included if their omission would make the interim financial information misleading. Further if a complete set of financial statements is published in the interim report, those financial statements should be in full compliance with IFRSs.
Importantly, that all events and transactions are recognized and measured as if the interim period is a discrete standalone period (i.e. there are no exemptions from recognition or measurement for that period other than on the grounds of materiality; for example, it may not be necessary to obtain an updated actuarial valuation for an employee defined benefit plan, but only if it can be assessed that the effects of not obtaining that update are not material).
As part of management’s responsibility for preparing the interim financial information, ordinarily management is expected to clearly indicate the applicable financial reporting framework that has been used to prepare the interim financial information so that users are informed. Management should be transparent and include comprehensive disclosures around the basis of preparation of interim statements and (if a review report has not been published) whether the auditor has carried out an interim review.
Issues arising from COVID-19 which may affect management’s preparation of interim reporting include:
- Management may face challenges in preparing the necessary information on a timely basis, particularly in the context of potential disruption to the flow of information within groups and restrictions of movement for staff.
- Remote working requirements and the related inability to be physically present at certain locations, often combined with reductions in efficiency and resources, may also result in a failure to maintain the effectiveness of existing internal controls.
- There could be challenges for the determination of inputs and assumptions used for accounting estimates and (particularly where IAS 34 is applied) likely requirements for impairment testing (impairment calculations are required to be determined on the basis of reasonable and supportable assumptions as of the reporting date). Likewise, in some reporting frameworks (including in IAS 34) management is responsible for assessing the entity’s ability to continue as a going concern and will need to make judgements about future periods.
- Due to the significant effects of COVID-19 on measurement (including assets and liabilities measured at fair value, defined benefit obligations, and triggers which require impairment tests to be carried out), significantly more work may be required for the preparation of interim financial information in 2020 in comparison with prior interim periods.
- Subsequent accounting can be affected by whether IAS 34 is applied at an interim reporting date. For example, IFRS does not permit goodwill impairment to be reversed in a subsequent reporting period. In addition, going concern assessments apply at interim reporting dates as well as the full year end. It may be challenging to obtain the required information on a timely basis and significant uncertainties around future developments increase the range of reasonably possible outcomes.
- IAS 34 requires an interim statement to provide an update on the last annual financial statements, including new activities, events and circumstances and refers to the disclosure requirements of specific IFRS Standards. An IAS 34 compliant interim statement is therefore required to include appropriate disclosures about the effects of COVID-19. However, when an interim statement does not comply with IAS 34, those disclosures may not be required, depending on the reporting framework which is used.
- There are emerging signs of entities disclosing pro forma interim financial information (‘normalised results’) which attempt to show the results that would have been achieved if COVID-19 had not occurred. Pro forma amounts showing ‘what if’ results are not permitted to be included in the income statement of an IAS 34 compliant interim statement. This restriction does not necessarily apply to non-IAS 34 compliant interim statements/trading updates.
The Independent Auditor’s Report - Review of the Interim Financial Information
Jurisdictional law or regulation, securities regulation, stock exchange rules, or national standards may require that the interim financial information of an entity be reviewed by the independent auditor of the entity. In cases when a review is not required, the entity may choose to have the interim financial information reviewed. When an auditor performs a review of the interim financial information, the engagement is typically performed in accordance with the International Standard on Review Engagements (ISRE) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by the IAASB (note some jurisdictions have established their own standard for auditors when performing a review of interim financial information).
For review engagements in accordance with ISRE 2410, the auditor expresses a conclusion whether, on the basis of the review, anything has come to the auditor’s attention that causes the auditor to believe that the interim financial information is not prepared, in all material respects, in accordance with an applicable financial reporting framework. The auditor makes inquires and performs analytical and other review procedures.
The objective differs significantly from that of an audit conducted in accordance with International Standards on Auditing (ISAs) as it is not designed to obtain reasonable assurance (i.e., the auditor obtains only limited assurance from the procedures performed). A review of interim financial information does not provide a basis for expressing an opinion whether the financial information gives a true and fair view, or is presented fairly, in all material respects, in accordance with an applicable financial reporting framework. A review may bring significant matters affecting the interim financial information to the auditor’s attention, but it does not provide all of the evidence that would be required in an audit.
For more detail on the independent auditor’s report on a review of the interim financial information please see specific section on the Summary of Covid-19 Audit Considerations webpage.
Interim Reporting Resources
- BDO June 2020 interim reports – in the context of COVID-19
- CPA Canada Covid-19 and Interim Reporting
- CAQ 10-Q considerations during COVID-19
- IASB IAS 34 Interim Financial Reporting
- IAASB Staff Audit Practice Alert, Review Engagements on Interim Financial Information in the Current Evolving Environment Due to COVID-19
- KPMG What is the impact of Covid-19 on interim financial statements?
- PWC Episode 85: Covid-19 and Interim Reporting (IAS 34)
- FRC Guidance for companies on Corporate Governance and Reporting (Including Interim Reports)
- ICAEW COVID 19: Interim Reporting and the Auditor’s Role
This webpage will continue to evolve. Readers are invited to share experiences on areas covered, additional challenges and other resources which they have found particularly helpful.
The following general resources may be helpful (please note that all resources are listed alphabetically by author and reflect no order of relative importance):
- Accountancy Europe Coronavirus Crisis: Implications on Reporting and Auditing
- AICPA Consequences of COVID-19 - Financial reporting considerations
- AICPA Illustrative public company disclosures
- Australian Securities & Investment Commission (ASIC) COVID-19 implications for financial reporting and audit: Frequently asked questions (FAQs)
- Deloitte IFRS in Focus- Accounting considerations related to the coronavirus 2019 Disease
- Deloitte Accounting and financial reporting considerations for audit committees regarding covid-19
- Deloitte Financial Reporting Considerations Related to Covid-19 and an Economic Downturn
- EY Applying IFRS - IFRS Accounting Considerations of the Coronavirus outbreak
- Grant Thornton Reporting the impact of COVID-19
- IESBA Covid 19: Ethics and Independence Considerations
- IFRS Foundation Covid-19 website
- IOSCO Statement on Importance of Disclosure about COVID-19
- IPSASB Covid-19 Relevant IPSASB Accounting Guidance
- KPMG COVID-19 Financial Reporting
- Moss Adams COVID-19 Disrupts Financial Reporting
- PWC Accounting implications of the effects of coronavirus
- PWC Covid-19 Audit Committee financial reporting guidebook
- RSM COVID-19: IFRS Financial Reporting Implications
Professional accountants may also be interested in the dedicated IFAC Covid-19 audit considerations web page.
Issues and Insights
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Christopher Arnold is a Director at the International Federation of Accountants (IFAC). He leads activities on contributing to and promoting the development, adoption and implementation of high-quality international standards, including the Member Compliance Program, Intellectual Property and Translations. Christopher is also responsible for IFAC’s SME (small- and medium-sized entities), SMP (small- and medium-sized practices) and research initiatives, which include developing thought leadership, public policy and advocacy. He was previously an Audit Manager for Deloitte and qualified as a professional accountant in a mid-tier accountancy practice in London (now called PKF-Littlejohn LLP). Christopher started his career as a Small Business Policy Adviser at the Association of Chartered Certified Accountants (ACCA). See more by Christopher Arnold
Director, Member Engagement and PAIB
Stathis Gould is responsible for IFAC member engagement and leads IFAC’s advocacy for professional accountants working in business (PAIB) and the public sector. A key element of his work is developing thought leadership and guidance in support of enhancing the recognition of and confidence in professional accountants as CFOs, business leaders, and value partners in the context of sustainability/ESG, data and digital transformation, and other emerging business trends and issues. Before joining IFAC, Stathis worked at the Chartered Institute of Management Accountants (CIMA), where he was responsible for planning and overseeing a program of policy and research that promoted and developed management accountancy. Prior to serving the accountancy profession, he worked in various roles in the private and public sectors in the UK. There, Stathis delivered financial and performance management in the National Health Service and worked for a technology company responsible for delivering the localization of software and content across the globe. Stathis holds a BA in European Business Studies, an MBA (with distinction), and a postgraduate certificate in Environmental Management, Economics, and Policy. He is a member of the Institute of Management Accountants. See more by Stathis Gould
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