The disruption brought about by the Covid-19 pandemic has had grave consequences on financial reporting and audit engagements by making them more complex. The effects of the pandemic has made those charged with governance for many companies to experience difficulty whilst making decisions regarding operational, financial and strategic matters.
While the pandemic was considered as a non-adjusting event during the reporting period of the 31st December 2019 year ends, it is however now an adjusting event for the subsequent reporting periods.
According to the 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.
Examples of non-adjusting events that need to be revealed in the financial statements include breaches of loan covenants, management plans to discontinue 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.
As such, there are multiple financial reporting implications to be considered by preparers of financial statements for the purposes of financial reporting. The current economic downturn and its wide spared effects on sales, financial markets and supply chains, aspects will require careful consideration during the financial reporting.
Therefore, when it comes to financial reporting, we advise those concerned with governance to take into account the following issues so as to make it easier during the subsequent reporting periods.
- Provide a fair view and presentation of the performance and position of your company. This can be achieved by providing detailed information on your cash flow impacts and detailed explanation of how your company is managing its liquidity risks;
- Correctly assess the going concern and disclosures of substantial doubt/ material uncertainty where it exists;
- Consider different scenarios, including a reasonably plausible downside scenario. After updating the forecasts, management will need to assess whether it expects to remain in compliance with financial covenants. Additionally, it is important to provide an estimate on whether your company will have sufficient liquidity to continue to meet its obligations as they fall due;
- Maintaining an environment of integrity and transparency as the basis for trustworthy and ethical decision-making across the organization;
In assessing the on-going concern, those concerned with governance should provide a project on whether the company can continue in operation for the next 12 months without any intention or necessity to wind up operations or liquidate. This view should be published in their financial statements and the auditor should form an independent view on its reasonableness.
The following areas should be considered when offering a projection on the going concern for the next 12 months.
- The liquidity risk;
- impairments of tangible and intangible assets including goodwill;
- the degree of potential operational disruption;
- potentially reduced demand for products or services;
- Availability of access to capital;
- Recovery of receivables and bad debt.
On the other hand, the auditor’s understanding of the client’s business environment will continue to shift in the long haul. For instance, there will be changes in the company’s organizational structure, governance arrangements and the overall business model and it is important for the auditor to understand how these changes will impact the audit.
Additionally, there are risks that are likely to increase the susceptibility to risk of material misstatement that continue to be heightened in the COVID-19 world. These include;
- The reduction or expansion of the business and subsequent demands has not been correctly estimated;
- Loss of financing due to an entity’s inability to meet requirements
- Increased risks of fraud
Those charged with governance together with auditors should have ongoing communication regarding the impact of Covid-19 on their businesses. An understanding of how the management is addressing the risks and business impacts is essential to the auditor to pinpoint the changes that may be required during subsequent reporting periods. Likewise, a true and fair representation of the performance of your company will go a long way ensuring efficiency in financial reporting.
For more information, please contact;
t +254 715 248882 | +254 733 533449