IAS-10 Subsequent Events & COVID-19

Photo by Joshua Ness on Unsplash

We have have been looking at financial reporting challenges which entities are facing during COVID-19 crisis. Recently we covered:

IAS 36 Impairment
IFRS 16 Leases
Financial reporting challenges

Today's post is about IAS 10 subsequent events. This standard is most important for those entities whose financial year has recently ended i.e. as of 31st Dec'19 and they are in a dilemma of whether the COVID-19 events after the reporting date are adjusting events or not. This perspective is also brought recently on LinkedIn through a comment on IAS 36 post.

Before explaining the impact, let me rewind the short explanation/intro of the standard.

Standard's Short Intro

The objective of the standard is to prescribe;

(a) when an entity should adjust its financial statements for events after the reporting period; and

(b)  the disclosures that an entity should give about the date when the financial statements were authorised for issue and about events after the reporting period.

The Standard also requires that an entity should not prepare its financial statements on Going Concern basis if events after the reporting period indicate that the going concern assumption is not appropriate

Standard defines the Events After Reporting Period as below in Para no. 3:

Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. Two types of events can be identified:

(a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and

(b) those that are indicative of conditions that arose after the reporting period (non‑adjusting events after the reporting period).

Standard provides following examples of adjusting events in para no.9

Following example is given for Non-Adjusting event in Para-11:

An example of a non‑adjusting event after the reporting period is a decline in fair value of investments between the end of the reporting period and the date when the financial statements are authorised for issue. The decline in fair value does not normally relate to the condition of the investments at the end of the reporting period, but reflects circumstances that have arisen subsequently. Therefore, an entity  does not adjust the amounts recognised in its financial statements for the investments. Similarly, the entity does not update the amounts disclosed for the investments as at the end of the reporting period, although it may need to give additional disclosure under paragraph 21.

Para 14 to 16 narrates that an entity shall not prepare financial statement based on going concern principle basis if management determines after the reporting period either that it intends to liquidate the entity or to cease trading, or either that it has no realistic alternative to do so.

Standard also provides below examples of events which occur after reporting period. Standard calls these events as non-adjusting events but calls for disclosure.

Relevance to Financial Statements in COVID-19 Crisis

As mentioned in my previous posts, organisation have to look at affects of Impairment of Assets under IAS 36 on assets value including right-of-use assets under IFRS 16 leases.

The question arises when this test shall be performed?

Answer is not same to all entities. It depends upon the entities financial year end and particular affects which entity had as of that year end date.

Below is the link of WHO timeline for actions taken so far:

https://www.who.int/news-room/detail/27-04-2020-who-timeline---covid-19

WHO calls it Public Health Emergency of International Concern (PHEIC) on 30th Jan 2020. If we take it a cut off point (which actually isn't practical and correct approach) then those organisations who financial period end is 31st Dec'19 can consider this event as adjusting or non-adjusting event which we shall study in detail now.

We saw above that adjusting events are those which provide evidence of conditions that existed at the end of the reporting period while non-adjusting events are those that are indicative of conditions that arose after the reporting period.

Having gone through the standard i have compiled below example points which i think are relevant to the current COVID-19 scenario.

Para 9B: This paragraph calls that an event shall be adjusting event if a further information is received after the reporting period that is indicative that an asset was impaired. Standard provides the bankruptcy of customer and sale of inventories as an explicit example to this point.

Para 14: An entity shall not prepare financial statements on the going concern principle if after the reporting period it is determined that entity intends to liquidate or cease operations or that it has no realistic alternative to do that. This paragraph is much related to organisation who are in trouble due to COVID-19, less revenue inflows and liquidity issues.

Para 11: An example of a non‑adjusting event after the reporting period is a decline in fair value of investments between the end of reporting period and the date when the financial statements are authorised for issue. The decline in fair value does not normally relate to the condition of the investments at the end of the reporting period, but reflects circumstances that have arisen subsequently. Therefore, an entity does not adjust the amounts recognised in its financial statements for the investments. Similarly, the entity does not update the amounts disclosed for the investments as at the end of the reporting period, although it may need to give additional disclosure under paragraph 21.

This paragraph surely calls the COVID-19 impacts as non-adjusting events for the investments and does not call for impairment testing if organisations financial period is ending before WHO announcement, 30th Jan 2020. Although instead of bench-marking 30th Jan, more practical approach should be determined by the entities.

Para 22G: This paragraph also provides examples of non-adjusting events whose disclosure is required. One of the examples given is below section G:
G: Abnormal large changes after the reporting period in asset prices or foreign exchange rates

This section i believe is most relevant in COVID-19 and calls for an appropriate disclosure instead of adjusting the event. It calls for the disclosure of nature of event which is COVID-19 in this case and an estimate of the financial affect. In case such financial impact can not be determined then a statement shall be made by entity that such an estimate cannot be made.

In the nutshell, Standard:

(a)Explicitly calls for impairment testing of receivables and inventories in case further information is received after the reporting period which provides evidence of conditions at the reporting date for the impairment.

(b)Calls for not preparing financial statements on going concern principle if entity does not seem having ability or intends to cease operations.

(c)Change in fair value of investments after reporting period is declared non-adjusting event, although a disclosure shall be made if financial impact is material.

(d)Abnormally large changes after the reporting period in asset prices or foreign exchange rates are declared non-adjusting event but disclosure is required.

So organisations whose financial period end is before 30th January (although not pinpoint model), have to impair those receivables and inventories whose further information after reporting period provides evidence of impaired conditions on the reporting date. While investments and other assets which are getting affected largely have to tested for impairment for an appropriate disclosure of financial impact. It shall be hard for organisations in such dynamic environment to accurately forecast the value in use or fair value of assets. In such case, those entities who aren't able to determine this financial impact have to provide a statement that such estimate can not be made.

Geography and business nature of the entities shall also play a major role in determining the impairment. Business in Wuhan-China got hit much earlier than others and some business sectors got hit more severely than others i.e. travel and leisure sector.

------------