COVID-19 & December year-ends

The Coronavirus has had a devastating impact on the world, on people, on health services, on their economies and the companies trying to stay afloat through it.

While I can’t talk to health, besides, ‘wash your hands’, ‘#socialdistancing’ and ‘stay safe’, I can talk to IFRS and what we expect the impacts to be on financial statements.

Over the next while, I will be issuing a series of short articles discussing the various IFRS/IFRS for SME impacts or expected impacts of the pandemic on South African companies.

The Coronavirus (or Covid-19) is said to have started in December 2019; it was declared a public health emergency by the World Health Organization on the 30^th of January 2020 and South Africa was put into a full lockdown from 26 March 2020 to 16 April 2020.

There are many South African companies with December 2019 year-ends, that are in the midst of their reporting process. With all the information being released into the market, how does Covid-19 impact the reporting requirements of an entity with a December 2019 year-end?

IFRS/IFRS for SME impacts

The first thing to note is that for a December 2019 year-end company, or even for a company reporting interims at 31 December 2019, this is a post-balance sheet event. The question is then whether this is an adjusting or a non-adjusting event?

Covid-19 is an event that arose after the reporting period in South Africa – it was only declared a public health emergency on 30 January and the first case was reported here on 5 March 2020 - it is therefore considered a non-adjusting post balance sheet event.

A non-adjusting balance sheet event becomes an adjusting event where it affects the going concern of an entity, even if this only comes to the fore after year-end but before the financial statements are issued. If the impact of the Coronavirus pandemic calls into question whether the entity will be able to continue as a going concern, then, in this circumstance only, the pandemic will be considered an adjusting post balance sheet event. The financial statements will then not be prepared on a going concern basis, or the considerations of material uncertainties of going concern should be disclosed. Factors that will be considered in this instance are, for example:

A significant decline in revenue;
A significant erosion of profits due to higher costs or unexpected expenses;
Breach of debt covenants;
Cash flow issues; and/or
The impact of the Government debt relief initiatives.

Where a going concern adjustment is not required, the impact of the outbreak should not be factored into the financial statement balances reported at 31 December 2019. However, it would impact disclosures and other key communications, for example the directors’ report, subsequent events and other sources of estimation uncertainty.

This reporting should include details as to what estimations the entity expects will change going forward, even where the full impact is not yet known, it would include details like:

The expected impairment on debtors and other assets could increase.
Accrued bonuses, or even dividend declarations that might be withdrawn and not paid.
Other provisions might become imminent for onerous contracts or restructuring provisions.
The entity might be applying for lease payment holidays, or its tenants could.
The fair values could be impacted.

JSE Listings Requirements impacts

Listed companies are required to issue their annual financial statements within four months of year-end and their interim financial statements as soon as possible within three months of year-end. The JSE released a statement that it has recognised that the measures implemented to deal with the pandemic in South Africa and globally might impact issuers’ ability to comply with, in particular, the timeous publication of their financial results. They encourage issuers to engage with the JSE through their sponsors where they might not be able to meet the requirement with regards to the completeness of, assurance reports over, or timing of their publications. The JSE will consider the merits and timing of each issuer individually, based on their circumstances.

These are unchartered territories; we don’t know where this is going or even where it will take us in the accounting world. What we do know is that things are changing. Hold on to your boots and let’s step forward together.

Stay safe, stay healthy.

Author

Justine Combrink

Source documents:

WHO https://www.who.int/emergencies/diseases/novel-Covid-19-2019

Wikipedia https://en.wikipedia.org/wiki/2020_coronavirus_pandemic_in_South_Africa

JSE https://www.jse.co.za/current-companies/issuer-regulation