COVID-19 & February period-ends

I wasn’t planning to write another article for entities with a February period-end, as so many people said that my previous article made it clear enough… but did it?

According to International Accounting Standard 10 Events after the Reporting Period, an adjusting event after the reporting period is one that provides evidence of conditions that existed at that date. International Financial Reporting Standards (‘IFRS’) doesn’t allow you to apply hindsight when accounting for year-end conditions.

Here’s the thing. Covid-19 did exist before the end of February; it was declared a Public Health Emergency of International Concern (‘PHEIC’) on 30 January 2020 and a pandemic by 11 March 2020[1]. By the end of February, the stock markets were already in a steady decline (some stocks steadier than others), and the country was holding its breath while waiting for the impact we all knew was coming. Would it be fair to say that Covid-19 is a non-adjusting event when it was expected to hit at any moment and markets were already adjusting for the impact? Probably not.

If it is an adjusting post-reporting date event, then the amounts in the financial statements must be affected. This is where the kicker lies. Entities must now apply judgement in determining which balances were likely to be impacted… and by how much. While the world is still reeling from the impact of Covid-19 and uncertain just how far-reaching it will be, financial teams must make estimates of what the potential impact was expected to be at 29 February. While the teams are working and reworking their budgeting models, they must consider what they realistically expected at 29 February. Entities cannot hide behind this being a non-adjusting event when everything pointed to an expected impact at that time.

The more obvious balances expected to be impacted would be any foreign debtors or loan accounts. By the end of January, it had moved from being a “Chinese virus”, as Trump often refers to it, to a PHEIC across Europe, and through February the world watched it move across the continents. South African debtors might not have been impacted directly by the end of February, unless they themselves also had foreign investments, or were impacted by the stock markets, but South Africa was expecting an impact. One would therefore expect entities to adjust at the very least their forward-looking information in their expected credit loss (‘ECL’) calculations.

The fair values at 29 February could possibly remain unaffected, as it is the valuation at a particular date. However, companies are required to exercise significant judgement in determining what balances need to be adjusted and then estimating the impact on these balances. For example, were bonuses still expected to be paid, was the recoverable amount included in the impairment calculations still applicable? etc. The estimated impact will require ongoing evaluation to determine the extent to which developments after 29 February should be recognised in that period.

Companies will need to carefully assess the specific facts and circumstances that affect the conditions that existed for them on or before the reporting date. The South African lock-down and Moody’s downgrade of our credit rating to junk status were not events that existed at period-end and should not result in adjustments for South African entities, but it would be considered on an international scale.

The JSE has given entities with a February period-end an optional two-month extension to present their financial results. While this does help entities during this lockdown period, it does require management to be even more discerning about identifying all the subsequent events that occurred between the reporting date and authorisation date, and users will expect the entity to have more information to disclose the estimates of the financial effects for both adjusting and non-adjusting events.

As mentioned in my previous article, events subsequent to year-end affecting an entity’s going concern is always an adjusting post-reporting date event. Auditors have required almost all entities to include this as a consideration and even adjusted their audit reports to consider this. Be careful to assume that Covid-19 is a non-adjusting event for everything else. If you were standing at 29 February, what would you have realistically expected to happen?

Many entities have claimed in their financial statements that the expected impact of COVID-19 could not be measured with any degree of accuracy and did not disclose any expected impact. This will not be accepted anymore. Entities need to include an expected impact. Yes, we all know and understand that it is difficult to measure, and we have no history to base the measurements on, but it is just that, an estimate. A good narrative will help users understand what your considerations were to be able to apply their own expectations.

Make sure you have properly considered the impacts or likely impacts of Covid-19 and present that as realistically as possible with good explanations and detailed judgements. It is a time for transparent and considered reporting.

[1]https://www.who.int/news-room/detail/08-04-2020-who-timeline---covid-19