The coronavirus pandemic is spreading quickly. Every day the media present us charts showing the growing number of reported cases and deaths, both on a global and local scale. The crisis is sure to come and will significantly affect business, due to decrease in production, trade or consumption and restrictions on traveling.
It should be expected that the economic effects will considerably impact the financial situation of companies and thus company accounting and reporting. For sure will vary from industry to industry or even from company to company, that is why it is crucial for company managers to consider and identify the exact implications (or potential implications) and to review them on a regular basis. Unfortunately, further development, duration or final impact of the pandemic on the economic reality cannot be easily predicted.
Issues that should be taken into account when preparing financial statements in the near future concern mainly:
- review and assessment of post balance sheet events;
- completeness and accuracy of data reported in the financial statements;
- assessment of the company and its possibility to continue as a going concern made by the company manager.
Post balance sheet events stated in the additional information
Pursuant to Art. 54 sec. 1 of the Polish Accounting Act “If after drawing up the annual financial statements and before their approval, the undertaking received information on events having material effect on the financial statements or that the going concerns assumption is unjustified, the undertaking shall adjust the financial statements and make relevant entries in the account books of the financial year covered by the financial statements as well as notify of this fact the statutory auditor who is reviewing or has reviewed the financial statements. If the post balance sheet events fail change the situation existing as at the balance sheet date, relevant explanation should be included in the additional information.”
Additionally, Art. 7 sec. 2 of the Accounting Act stipulates that “Individual assets and liabilities shall be measured at prices (costs) actually paid for their acquisition (manufacturing), in compliance with the prudence principle. First of all, the financial result should, regardless of the amount, include:
1) decrease in the value in use or commercial value of assets, including depreciation and amortisation write-offs;
3) only indisputable other operational revenue and extraordinary gains;
4) all other operational costs incurred or extraordinary losses;
5) provisions for risk known to the company, possible loss or effects of other events.
Events specified in sec. 1 should be considered also if they have been recognised between the balance sheet date and the date of the actual closing of the account books”.
The National Accounting Standard No. 7 “Changes of accounting principles (policy), correction of errors, changes in estimates and post balance sheet events – recognition and presentation” should also be taken here into consideration.
We can find there post balance sheet events (events which occurred after the balance sheet date up to the date of approving the financial statements) broken down by their impact on the financial statements:
- Events providing evidence of a particular situation as at the balance sheet date;
- Events indicating the post balance sheet situation.
Due to the above, the coronavirus pandemic should be deemed an event indicating the post balance sheet situation (in case of financial statements covering the period ended as of 31 December 2019). It was impossible to determine the effect of the epidemic in China, which, as at 31 December 2019, seemed a local phenomenon. In such case, any potential impact of the pandemic on the financial statements should be recognised in the additional information section.
The issue looks different if we consider financial statements prepared for a later period or as at a later date, e.g. as at 31 March 2020. In such case the coronavirus pandemic should be deemed an event providing evidence of a particular situation as at the balance sheet date, which means that it should be taken into account when measuring assets and liabilities as at the balance sheet date.
It should be noted that it is the manager of the undertaking who is responsible for the recognition and assessment of the post balance sheet events.
The Polish Chamber of Statutory Auditors has published an alert in which it recommends that companies which may be affected by the pandemic in the coming months use some exemplary indications in their financial statements. The final statement should specify the company situation.
- At the end of 2019 first news from China related to COVID-19 (coronavirus) reached the world. In first months of 2020 the virus spread globally, and has negatively affected a number of countries. Although at the moment of submitting the financial statements the situation is still changing, it seems that the negative impact on world trade and on the company itself may be much greater than expected. Currencies used by the company have depreciated, the value of shares decreased, and prices of goods are subject to considerable fluctuation /are much lower. The Management Board does not treat this situation as an event not requiring amendments to the 2019 financial statements, but as a post balance sheet event requiring additional recognition. As the situation is changing dynamically, the company Management Board believes that it is impossible to offer any estimates as to the potential impact of the current situation on the company. The potential impact will be recognised in the form of write-offs on assets and provisions for expected losses in 2020.
- The company Management Board closely monitors the situation and seeks ways to mitigate any impact on the company, however
[.... lack of increased demand for oil and decrease in global prices of oil will directly affect the company revenues, as long as the prices fail to increase.]
[... the company obtains a great number of products from China /countries much affected by the pandemic, which are used in the production process, and distortions in the supply chain may negatively affect the company manufacturing activities. The company holds sufficient inventory to continue production for the period of [XXX], however, if the supply chain remains distorted, it will negatively affect the company revenues. This may require testing the assets for impairment. The revenue would need to be decreased by X% due to the distortion in the supply chain, before it will be necessary to recognise impairment losses.]
[.... the sector of recreation and entertainment within the Capital Group will probably be affected by the decreased level of tourism and lower numbers of tourists around the world. Tourism and travelling decreased by X% compared to the same period in 2019, thus, the revenue generated in the first half of 2020 will probably be from X% to Y% lower than in the previous year]
[.... the main contract with the supplier from China for XXX has been annulled, and the company is currently negotiating with other contractors the annulment of similar contracts in 2020].
- At the end of 2019 first news related to the coronavirus from China reached the world. In first months of 2020 the virus spread globally, and its negative impact gained speed. The Management Board does not treat this situation as an event not requiring amendments to the 2019 financial statements, but as a post balance sheet event requiring additional recognition. Although at the moment of submitting these financial statements the situation is still changing, so far the company Management Board has not observed any material impact on the company sales or supply chain, however, the future implications cannot be predicted. The company Management Board will continue to monitor the potential implications and take every possible step to mitigate any negative impact on the company.
Continuing as a going concern
Pursuant to Art. 5 sec. 2 of the Accounting Act “When applying the accepted accounting principles (policy) it is assumed that the undertaking shall continue as a going concern in the foreseeable future within the scope that has not been materially changed, and that no bankruptcy or liquidation proceedings have been instituted against it, unless this is incompliant with its actual or legal situation. Establishing the undertaking’s capability of continuing as a going concern, the manager of the undertaking shall consider all information available as at the date of the financial statements concerning the foreseeable future, i.e. the period of at least one year of the balance sheet date”.
In the introduction to the financial statements, the manager of the undertaking indicates if the company will continue operations and, on the basis of this principle, the assets and liabilities are measured in the financial statements. Under the going concern principle, assets held by the company and their impairment are measured at cost actually incurred, regardless of the fact that in some cases the current market price may substantially differ from the historical cost.
The current market situation, i.e. shortage of raw materials supplies, problems with ensuring continuity of production, decrease in sales etc. and, on the other hand, the need to fulfil own (professional, bank, other) obligations, questions the possibility, or at least forces us to make a thorough analysis and assessment of the possibility of continuing as a going concern. It should be noted that it is always the manager of the undertaking who is responsible for making such a decision.
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Should you have any questions or wish to discuss the topic further, we encourage you to contact our expert, Michał DREAS:
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