19 November 2020
Coronavirus is likely to impact on the recognition and disclosure requirements for events after the reporting date.
What does FRS 102 say?
FRS 102 (Section 32) governs the recognition and disclosure requirements for events after the reporting date. The key question for preparers of financial statements will be whether, and to what extent, the effects of coronavirus represent adjusting or non-adjusting events.
Adjusting events “provide evidence of conditions that existed at the end of the reporting period,” whereas non-adjusting events “are indicative of conditions that arose after the end of the reporting period.”
Amounts recognised in the financial statements are adjusted for adjusting events, but not for non-adjusting events. However, the numerical effects of non-adjusting events still need to be quantified for inclusion in the required disclosures.
For entities applying section 1A of FRS 102, 1AC.39 requires:
The nature and financial effect of material events arising after the reporting date which are not reflected in the income statement or statement of financial position must be stated.
A decision after the reporting date that the entity will liquidate or cease trading either by choice or out of necessity is always treated as an adjusting event and results in the financial statements being prepared on a non-going concern basis. This article discusses events which do not affect the going concern assumption.
Practical impact and interpretation for preparers
Most commentators, including RSM, agree that if entities have a reporting date after the WHO declared coronavirus a global pandemic on 11 March 2020, it is reasonable for the effects of coronavirus to be treated as adjusting events.
Up to 11 March 2020 the situation has been evolving in different countries at differing times, so entities which have a reporting date before then will have to exercise judgement. It is generally accepted the impact of coronavirus is unlikely to be considered a factor that would have a material effect on the measurement of assets and liabilities and therefore would not be an adjusting event for entities with a 31 December 2019 reporting date.
If a UK entity has a reporting date of 31 January 2020 and its principal customer in China became bankrupt in April 2020 because of the effects of coronavirus, management may conclude that the conditions existed prior to the reporting date and recognise the impairment of the debtor balance in this year’s financial statements in line with the treatment for adjusting events. If that same principal customer was in France, management may not be able to use coronavirus to justify the same treatment on the basis that very few cases had been confirmed outside of China at 31 January 2020.
The judgement over whether related events are treated as adjusting or non-adjusting could have a significant effect on the amounts recognised in the financial statements and a detailed disclosure should be provided to state the conclusion and its effect.
For adjusting events there is no explicit disclosure requirement, however, the general requirement to include information which is material to the users of the financial statements, including significant judgements, still applies and if the effects are material then disclosure should be provided.
For non-adjusting events, the nature of the event and the estimated financial effect of the event should be disclosed. In many cases there will be uncertainty over what the financial effects of coronavirus are likely to be, however management should attempt to estimate this, and may find it useful to include a range of outcomes and should not simply disclose that they are unable to quantify the financial effect of the adjustments.
Disclosures should be included in the most relevant location in the accounts, and to avoid clutter should not need to be repeated. As such, and as ,there is no requirement to have a specific post balance sheet events note, it may be more appropriate to include disclosure of material non-adjusting events in the relevant note that they relate to – eg the going concern accounting policy may refer to events since the reporting date, or the short term creditors note may include narrative that a waiver of a loan covenant breach has been obtained since the reporting date, but there wouldn’t need to be a separate post balance sheet event note at the end of the accounts repeating these items.
Waivers of loan covenant breaches received after the year end are non-adjusting post balance sheet events. This may mean entities that have breached loan covenants at the reporting date find their long term bank loans are reclassified to short term (with a clear impact on net current assets/liabilities) despite obtaining a waiver or adjustment to the bank facility from the lender in the post year-end period. The waiver would be disclosed as a non-adjusting event and taken into consideration as part of the going concern assessment.
In its reviews of corporate reporting the FRC has consistently concluded that these disclosures should not be ‘boiler-plate’ and should assist the user in understanding what the effect of making the alternative judgement would be. Preparers should consider carefully whether the effects on an entity are sufficiently material to require disclosure. If so, it may be necessary to delay publication of the financial information until more reliable estimates of the financial effect can be made.
- Entities must review post balance sheet events to determine which are adjusting and which are non-adjusting.
- Disclosure of the judgements involved as well as the events themselves will be crucial.
- Entities should review their loan covenants during the financial year and at the year end to assess whether loans require to be reclassified to short term.
- Loan covenants should also be reviewed to the date of signing the accounts as any breach post year end could be a disclosable non-adjusting event, as would a waiver received post year end.