Coronavirus has brought a number of unexpected changes to our lives. Many of these changes have an impact on entrepreneurship, economy or the accounting itself. Our experts prepared a list of the most significant changes in accounting that the coronavirus entails.
1. Going concern
Financial statements should be prepared on a going concern basis, unless management intends either to liquidate the entity or to cease trading or has no realistic alternative but to do so.
Minimum requirement
Management is required to assess at the time of preparing the financial statements the entity`s ability cover the entity’s prospects for at least 12 months from the end of the accounting period.
Existence of significant doubts shall be disclosed but it is not sufficient reason for the preparation of the financial statements on a going concern basis. Disclosed uncertainty about the future prospects of the entity should contain depiction of circumstances (degree of consideration and conclusion reached) and significant judgements made.
2. Financial instruments
The entity needs to assess if the sale of the financial instruments is in the line with the entity`s documented investment policy. If the sale is due to increased credit risk, it could be still consistent with hold-to-collect business model.
Entity should also assess if the expected credit loss model is correctly presented due to pandemic the liquidity problems could rise what could influence the credit quality of financial instruments.
This assessment will require significant judgement, update of macroeconomics scenarios. The disclosure of these judgements, estimates and key assumptions are going to be more important.
3. Impairment of non-financial assets
The entities are required to provide the impairments test of non-financial assets when the indicators of value deterioration exist. Due to pandemic the external indicator influence all the entities and they need to be prepared to perform the significant impairment testing and measure the value in use and fair value of non-financial assets.
Entities should consider providing detailed disclosures on the assumptions and sensitivities.
4. Government grants
Accordingly, entities should analyse all facts and circumstances carefully to apply the appropriate relevant accounting standards:
- Benefit of a low-interest loan would be accounted for under IFRS 9 and IAS 20,
- Reduction of income tax is accounted for under IAS 12 Income Taxes,
- Rental reductions or deferrals may be accounted for under IFRS 16 Leases,
- Government grants related to agricultural activity are dealt in IAS 41 Agriculture.
5. Income tax
Any tax relief or rebates received by the government need to be carefully assessed in order to determine whether they should be accounted for as a reduction to the income tax expense, or the receipt of a government grant.
Uncertainties relating to income taxes arising from these new government measures will require entities to consider whether they should recognise and measure deferred tax assets or liabilities at a different amount.
6. Leases
If there has been a change in the lease, entity need to assess whether the changes are in the line with the original terms and conditions of the lease. Otherwise the entity should account for lease modification.
On 28 May 2020, the IASB issued Covid-19-Related Rent Concessions -Amendment to IFRS 16 Leases (the amendment) for lessee.
A lessee applies the amendment for annual reporting periods beginning on or after 1 June 2020.
The Board amended the standard to provide optional relief to lessees from applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the coronavirus pandemic. The lessee could the rent concessions account directly to income statement.
7. Onerous contracts
The unavoidable costs under an onerous contract reflects the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.
In assessing the unavoidable costs of meeting the obligations under a contract at the reporting date, entities, especially those with non-standardised contract terms, need to carefully identify and quantify any compensation or penalties arising from failure to fulfil it.
8. Revenue recognition
Entity need to consider impact of the modification and termination of contracts, other variable consideration and customer incentives following the collectability.
9. Inventories
Reduced demand may lead entities to write-down their inventories to net realisable value and determining net realisable value may require the use of significant judgement and additional disclosures are necessary.
10. Events after the reporting date
Entities need to ensure effective processes are in place to identify and disclose material events (both adjusting and non-adjusting) after the reporting period which could reasonably be expected to influence decisions that the primary users of general-purpose financial statements make on the basis of those financial statements.
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