The Financial Reporting Council (FRC) recently issued Guidance dated April 22, 2020, for the directors and those charged with governance to assess the risk of COVID-19 at an early stage of the financial reporting and audit process concerning the preparation of financial reporting (quarterly, interim and annual) ending on or after January 1, 2020, and financial reporting ended on or before December 2019 or any prior year financial statements not yet finalised.
For the assessment of the impact of COVID-19, direct and indirect financial impacts on entities include –
(i) the effect of government and regulatory relief programmes on both the company and customers
(ii) changes in employee benefits assumptions and planned assets
(iii) indirect impacts from suppliers, customers, financiers or investments in other companies that may be adversely affected, which may lead to impairments, increased costs or decreased revenues, etc.
On events after reporting period, where the entity’s reporting period has already ended (on or before December 31, 2019), IAS 10 requires entities to consider whether an event that occurs after the reporting period provides evidence of conditions that existed at the end of the reporting period such that the subsequent events amount to adjusting events. The FRC concurs that the outbreak of COVID-19 in 2020 was a non-adjusting event for most of the companies in Nigeria preparing financial statements for the period ended December 31 2019. Hence, the effect of the outbreak should reflect in subsequent financial reports with post-December 2019 reporting dates. Even where assessed that COVID-19 is a non-adjusting event by an entity, the nature of the event and its likely impact should be “disclosed” based on materiality vide an estimate (quantitative or qualitative) or assumptions made in valuations or sensitivity analyses of the financial effect on the entity. Otherwise, the fact that the financial effect cannot be estimated and also key assumptions as to why there is no financial impact should be disclosed.
On a going concern under IAS 1, an entity in its assessment should consider all relevant future information for at least, but not limited to, the twelve months after the reporting date such as new travel bans, government grants/assistance and others. Financial statements should no longer be prepared on a going concern basis where there are plans to liquidate or cease trading or has no realistic alternative but to do so, either before or after the reporting period ends. Material uncertainties that cast significant doubt on the ability to continue as a going concern such as the extent of the impact on future costs and revenues and unknown duration of the impact must be disclosed.
On Group Reporting, the provisions of the relevant standards (IFRS 10 and 1AS 28) should be adhered to when it is impracticable to obtain information necessary to prepare financial statements for the group from subsidiaries, associates or joint ventures.
The FRC Guidance also addressed the modification of financial instruments (substantial or otherwise) and calculation of expected credit losses in accordance with IFRS 9 and IAS 39 (for insurers yet to adopt IFRS 9) and stipulated amongst others that:
1. the impact of the economic support and possible relief measures on recognised financial instruments and their conditions should be assessed using both qualitative and quantitative criteria or significant judgment in the preparation of financial statements with the attendant disclosures.
2. In response to COVID 19, the Nigerian Government is establishing various economic support programmes for the businesses or industries that are most impacted to reduce the adverse effects of COVID-19 and related economic consequences.
3. Hence, when these support programmes impact or decrease the lifetime risk of default on a financial instrument, this should be considered in the assessment (using qualitative and quantitative indicators) of the significant increase in credit risk (SICR) of that financial instrument since its initial recognition, in the preparation of the financial statements.
4. In compliance with the requirements of the IFRS, all relevant disclosures related to the actual and potential impacts of COVID-19 should be made by entities.