Emergency situation in connection with COVID-19 – financial statements 2019

The main risks include

•  production stop, supply chain interruption or other business activity disruptions,
• interruption of future cash flows and impact on the company’s liquidity and financial standing.

These risks can jeopardize the continuity of an accounting entity, therefore, notes to final accounts should include information on what the impact of this event will be and how the entity’s management has assessed it. Notes should include a description of the accounting entity’s situation within ″subsequent events″. AE can declare that the current situation has no significant negative impact (e.g. We have assessed all potential effects of COVID19 on our business activities and we have concluded that our ability to pursue our activities and to operate as a healthy entity in the following 12 months will not be significantly affected).

If significant negative effect is expected, AE will describe all threats (e.g. We have assessed all potential effects of COVID19 on our business activities and we have identified the following significant negative effects on our financial standing/ability to pursue our activities in the following 12 months.)

To assist AEs in this situation, we have prepared several examples of information that AEs could include in the notes:

Example 1

In late 2019, first news related to COVID-19 (coronavirus) arrived from China. In the first months of 2020, the virus spread to the entire world with negative consequences on many countries. Although at the time of publishing of the final accounts, the situation is constantly evolving, it seems that negative effects on global trade, companies and individuals might be more severe than previously expected. The exchange rate used by this accounting entity has weakened, market value of shares has dropped and commodity prices are experiencing serious fluctuations. As the situation is continuously changing, management of this accounting entity does not believe that it is possible to provide quantitative estimates of a potential impact of the current situation on this accounting entity. Any negative effects or losses will be included in the accounting and final accounts of this accounting entity in 2020.

Example 2  

In late 2019, first news related to COVID-19 (coronavirus) arrived from China. In the first months of 2020, the virus spread to the entire world with negative consequences on many countries. The Board of Directors/Administrative Board of this accounting entity has been carefully monitoring the situation looking for ways how to minimize the impact on the company, however:

[...our entity purchases several raw materials from China / countries which have been struck hard by the epidemic. These materials are used in the production process and a disrupted supply chain might negatively influence the accounting entity’s production activities. The accounting entity has sufficient stock to maintain the production for [a period of XXX], however, should the supply chain disruption continue, it will have a negative effect on the income of this accounting entity. This might in turn lead to the need to test a reduction in asset value. As a consequence of disrupted supply, income would have to be reduced by X% of the supply chain to trigger considerations on reductions in value.]

[...in the area of leisure and tourism, the level of touristic activity and the number of tourists from all over the world is expected to decrease. Tourism and travels within the country have decreased by X% in comparison to the same period in 2019, which means that the income of this accounting entity in the first half of 2020 will probably drop by X to Y% in comparison to the previous year.]

[...the contract on the supply of materials/main components for our production with a Chinese supplier regarding XXX has been dissolved and our entity is currently negotiating with other contracting parties on the supply of materials/main components for our production in 2020].

Example 3

In late 2019, first news related to COVID-19 (coronavirus) arrived from China. In the first months of 2020, the virus spread to the entire world causing major negative effects. Although at the time of publishing of the final accounts, management of this accounting entity has not registered an apparent/significant decrease in sales, as the situation is constantly changing, it is impossible to predict future impact/effects. The management will continue to monitor potential effects and take all necessary steps to mitigate any negative impact on the company and its employees.