Why Events after the reporting period may be relevant to the financial statements of the previous period?
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For many entities, disclosure about the impacts of COVID-19 in this year’s financial report and annual report will be a key point of difference compared to previous years. Show
Under Australian accounting standards, entities must reflect material events, whether favourable or unfavourable, that occur between the reporting date and the date when the financial statements are signed. This requirement is extended if there is a time gap between the date the financial report is signed and its publication in the annual report. The COVID-19 pandemic evolved rapidly in 2020 and we should prepare for material changes between balance date and the publication of information. Financial reports may need to be adjusted or more information added to help keep readers informed of impacts on entities. The COVID-19 pandemic will require ongoing evaluation to determine the extent to which developments after the respective reporting date should be recognised in the financial statements. After your reporting date, your entity will need to capture and assess events that relate specifically to conditions that existed at or before the reporting date—that is, adjusting events. To do that, you need to assess your specific facts and circumstances to identify events that generally represent the culmination of a series of conditions that existed at or before the reporting date. Financial reports may also need to include disclosures on conditions that arose after the reporting period that don’t need to be included in the financial information but are important for a reader to know. These are non-adjusting events. Examples of events include:
Queensland Treasury has supplied guidance to departments and statutory bodies about disclosing the impact of COVID-19 on:
(Refer FRR 1A, section 1.6.3.) Other entities may be able to adapt this guidance to their own circumstances. Considerations for assessing events after the reporting periodYour latest monthly management accounts are a primary source for identifying subsequent events. Any material changes in the actual or forecast figures presented in these accounts indicates a subsequent event. Also consider any internal decisions your entity has made since balance date with a financial impact that has not yet flown through to your management accounts. For example, new contracts or programs could have significant consequences for your entity’s future finances. Finally, consider changes in your external environment. For example, a second wave of COVID-19 could have material implications that require disclosure. Consistency of reporting about COVID-19 impacts between the financial report and annual reportUsers expect that an entity would have more information available to disclose the effects of COVID-19 on their financial report and operations when they publish their annual report several months after the reporting date. Your audit team will read and consider the information included in your annual report. We do this to ensure that the information is materially consistent with the financial report and may ask entities to make changes to the annual report to ensure readers can rely on the information. This year, audit teams will focus on pandemic disclosures. Actions for management to take now
Click to enlarge image (JPEG) Impact at reporting date(s) 31 December 2021 and 31 January 2022 For 31 December 2021 and 31 January 2022 financial statements, the financial reporting effects of these events and market conditions are generally non-adjusting events (with the exception of going concern). This is because the significant adverse changes in economic conditions and the political/business environment developed as a direct consequence of events arising after the reporting date – i.e. the Russian government’s military invasion of Ukraine and the resulting implementation of economic sanctions by the international community. Although certain events may have already occurred before 31 December 2021 or 31 January 2022 (in particular, the fact that Russian troops were mobilised around the Ukrainian border and certain sanctions had previously been imposed), the invasion of Ukraine was a specific, defined event that occurred only on 24 February 2022 – i.e. after the reporting date – and the significant sanctions imposed, as a co-ordinated package by the international community, were a direct response to that invasion. Therefore, based on information about these events and market conditions that was reasonably available as at 31 December 2021 and 31 January 2022, although market participants may have reflected the risks as a result of the uncertainty arising from the escalating tensions in the region in their assumptions, they would not have reflected the impacts of the invasion and the significant response from the international community that followed. Subsequent periods – including 28 February and 31 March 2022 For companies with reporting periods ending on or after 24 February, and calendar year end companies reporting in the first quarter of 2022, these events and market conditions are likely to be a current-period event that will require ongoing evaluation to determine the extent to which developments after the respective reporting date should be recognised in that reporting period. As the impacts continue to evolve, capturing events that relate specifically to conditions that existed at or before the reporting date – i.e. adjusting events – will require careful assessment. To do that, companies need to carefully assess their specific facts and circumstances to identify events that generally represent the culmination of a series of conditions that existed at or before the reporting date. Disclosures For material non-adjusting events, companies are required to disclose the nature of the event and an estimate of its financial effect, or a statement that an estimate cannot be made. A non-adjusting event is considered material if it is of such importance that non-disclosure would affect the ability of the financial statements’ users to make proper evaluations and decisions. [Insights 2.9.30.30] As the date of authorisation moves further from the reporting date, users might expect that a company would have more information available to disclose an estimate of the financial effects of a non-adjusting event.
If the widespread impact of COVID-19 began during the entity’s reporting period, the impact will be reflected in its financial statements for that period. However, to the extent that the widespread impact of COVID-19 occurred during the entity’s ‘subsequent events period’ (ie the period between the end of the reporting period and the date when the financial statements are authorised for issue), management must determine how material developments after the year-end should be reflected in the entity’s financial statements for the period under audit or review. In accordance with IAS 10 ‘Events after the Reporting Period’, entities are required to distinguish between subsequent events that are adjusting (ie those that provide further evidence of conditions that existed at the reporting date) and non-adjusting (ie those that are indicative of conditions that arose after the reporting date). Entities are required to update the carrying amounts of any assets or liabilities recognised in their financial statements to reflect any adjusting events that occur during the subsequent events period. Download 'Events after the reporting period' [ 139 kb ] When does COVID-19 not become an adjusting event?In our view, the impact of COVID-19 would be a non-adjusting subsequent event for reporting periods ended on or before 31 December 2019. Consequently, there would be no impact on the recognition and measurement of assets and liabilities in an entity’s financial statements. Although cases of the virus in Wuhan City, China were reported to the World Health Organisation (WHO) on 31 December 2019, there was little confirmed evidence of human-to-human transmission at that time and the WHO did not declare the outbreak to be a public health emergency of international concern until 31 January 2020. As such, it is presumed that the significant development and spread of COVID-19 did not take place until January 2020. Financial statements for an entity with a reporting period ending on or before 31 December 2019 should only reflect the conditions that existed at 31 December 2019 and must therefore exclude the significant effects of the COVID-19 pandemic. However, all reporting entities should determine whether or not they should make additional disclosures to describe the impacts of the outbreak in the subsequent events period. Generally, disclosure should be made of those events during the subsequent events period that do not relate to conditions that existed at the date of the financial statements but cause significant changes to assets or liabilities in the subsequent period and either will, or may, have a significant effect on the future operations of the entity. For material non-adjusting events, IAS 10 stipulates an entity must disclose (a) a description of the nature of the event; and (b) an estimate of the financial effect, or a statement that such an estimate cannot be made. Examples of non-adjusting events that would generally result in disclosure include:
All disclosures should be entity-specific and include information relevant to their circumstances. The following are some examples for some potential non-adjusting events for 31 December 2019 financial statements:
Overall risk to operations
Since 31 December 2019, the spread of COVID-19 has severely impacted many local economies around the globe. In many countries, businesses are being forced to cease or limit operations for long or indefinite periods of time. Measures taken to contain the spread of the virus, including travel bans, quarantines, social distancing, and closures of non-essential services have triggered significant disruptions to businesses worldwide, resulting in an economic slowdown. Global stock markets have also experienced great volatility and significant weakening. Governments and central banks have responded with monetary and fiscal interventions to stabilise economic conditions. [Add description specific to how the entity’s financial position and performance has or is likely to be affected] The Company has determined that these events are non-adjusting subsequent events. Accordingly, the financial position and results of operations as of and for the year ended 31 December 2019 have not been adjusted to reflect their impact. The duration and impact of the COVID-19 pandemic, as well as the effectiveness of government and central bank responses, remains unclear at this time. It is not possible to reliably estimate the duration and severity of these consequences, as well as their impact on the financial position and results of the Company for future periods. Note: This disclosure assumes there is no significant doubt about the entity’s ability to continue as a going concern.
On 27 March 2020, in response to significant decreases in demand resulting from social distancing efforts, quarantines and border closures related to the spread of COVID-19, the Company announced that it would temporarily close 30 of its 100 stores, which represented average monthly sales of approximately CU325,000 during the year ended 31 December 2019. The closures are expected to reduce the following expenses by the following amounts on a monthly basis for at least the next six months : [insert specific line items and amounts in a table below] The Company also announced that it would continue to pay its store associates for all scheduled shifts that were planned for the two-week period beginning on 27 March 2020. The salaries and benefits expense estimated for this two-week commitment is approximately CU50,000.
During March 2020, in response to significant decreases in demand amidst the COVID-19 outbreak, the Group announced its intention to temporarily reduce its workforce by 130 positions by the end of April 2020, by means of either reduction in hours or temporary leave. The Group plans to continue providing health benefits for furloughed employees through to 30 June 2020. The Group expects the reduction in positions to reduce salaries and benefits expense in 2020 by a net amount between CU25,000 and CU20,000 per month. Other expected financial effects include… [insert details]
Subsequent to 31 December 2019, one of the Company’s major trade customers declared bankruptcy following severe decreases in sales as a result of the continued spread of COVID-19. Of the CU135,000 receivable from this customer, the Company expects to recover less than CU10,000. The allowance for expected credit losses for this receivable was CU5,000 as of 31 December 2019.
Decline in fair value of investments
Since 31 December 2019, the outbreak of COVID-19 and related global responses have caused material disruptions to businesses around the world, leading to an economic slowdown. Global equity markets have experienced significant volatility and weakness. As at 31 March 2020, the date that these financial statements were authorised for issue, the fair value of the Group’s investments had declined significantly to the following amounts: [insert figures here] While governments and central banks have reacted with monetary interventions designed to stabilise economic conditions, the duration and extent of the impact of the COVID-19 outbreak, as well as the effectiveness of government and central bank responses, remains unclear at this time. These subsequent changes in the fair value of the organisation’s investments are not reflected in the financial statements as of 31 December 2019.
Since late January 2020, the number of COVID-19 cases and countries affected outside of China grew rapidly, and on 11 March 2020, the WHO declared COVID-19 to be a global pandemic. During this period, governments and various private sector organisations took significant measures to contain the virus, including quarantines and school, store, plant and border closures. Consequences of the outbreak have also contributed to significant volatility in global stock markets since late February 2020. Broadly speaking for reporting periods that ended on or after 31 January 2020, our view is that enough was known about the pandemic for preparers and market participants to reflect and, if necessary, adjust the assumptions and assessments. Furthermore, the later the annual reporting period is after this date (ie 31 March 2020, 30 June 2020 or 30 September 2020), the greater the number of COVID-19 related consequences have to be factored in to any adjusting event determinations and disclosures that are made. Every reporting entity has to carefully consider the conditions and how they impact the reporting entity, because the same condition could impact entities differently for the same reporting date. IAS 10 makes it clear that management should consider the specific circumstances that relate to the entity’s operations and the relevant events that existed in their jurisdiction at that time. It is appropriate for management to consider the following information which potentially became apparent subsequent to period-end when assessing the accuracy of their estimates and judgements made prior to the information becoming available:
Where this judgement has a significant impact on the amounts in the financial statements, it should be disclosed in accordance with IAS 1. When it is determined that COVID-19 was an event that existed and caused an impact to operations at or before the reporting date, it should be accounted for as an adjusting event in compliance with IAS 10.
What is the impact of COVID-19 on 31 March 2020 reporting dates?
Based on guidance issued by some regulators, our recommendation is that reporting entities put all the matters relating to COVID-19 into one part of their financial statements and make sure that the matter of COVID 19 is prominently displayed. Below is an extract from Macquarie Group Limited in Australia, who disclosed the COVID-19 impact in Note 1 of its 31 March 2020 consolidated financial statements.[i] Under the major note heading called ‘Summary of Significant Accounting policies’ it had a subheading addressing the entity’s ‘Basis of Preparation’ and under that heading a further subheading to draw attention to the impact of COVID-19 on the consolidated entity’s financial statements. [i] For complete details of the financial statements that were approved for issue in 8 May 2020 please refer to www.macquarie.com
Note 41 – Coronavirus (COVID-19) impact
Derivative assets and liabilities Held for sale assets and liabilities Loan assets, due from subsidiaries and other assets Property, plant and equipment and right-of-use assets Interest in associates and joint ventures, investments in subsidiaries and interests in unconsolidated structured entities Intangible assets Debt issued and loan capital Hedge accounting Risk management
This accounting policy note sends the readers of these financial statements to ten other detailed notes within its consolidated financial statements, therefore illustrating that for this Australian financial institution multiple financial statement areas have been impacted by the pandemic. To make it clear to the readers of their consolidated financial statements there were not any other material matters that needed to be disclosed, Macquarie made the following disclosure in its final note of its 31 March 2020 consolidated financial statements:
Note 50 – Events after the reporting date
There were no material events subsequent to 31 March 2020 and up until the authorisation of the financial statements for issue, that have not been disclosed elsewhere in the financial statements.
Preparers of financial statements will need to be agile and responsive as the situation unfolds. Having access to experts, insights and accurate information as quickly as possible is critical – but your resources may be stretched at this time. We can support you as you navigate through accounting for the impacts of COVID-19 on your business. Now more than ever the need for businesses, their auditor and any other accounting advisors to work closely together is essential. If you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm. |
