COVID-19 Accounting Implications

It is likely that most companies are being directly or indirectly impacted by the COVID-19 pandemic, whether it is due to the disruption on business operations or reduction in profitability (amongst others). This article will focus on the accounting implications of the pandemic, by highlighting the possible impacts on financial reporting that entities should seriously consider.

Events after the reporting period / Post balance sheet events

IAS 10 / GAPSME Section 19

Both IAS 10 and Section 19 of GAPSME define these events as occurring between the balance sheet date and the date of authorisation of the financial statements. They distinguish between an adjusting event, which points to conditions that existed before the year-end, and a non-adjusting event, which is indicative of a condition arising subsequent to the year-end of an entity.

In this case, the disease first emerged in December 2019 and the World Health Organization declared the outbreak a Public Health Emergency of International Concern on the 30^th January 2020 and a pandemic on the 11^th March 2020. Therefore, although the disease itself already existed at most entities’ year-end date, that is 31^st December 2019, what is being assessed is the implication of the disease on local businesses rather than the disease itself. The implications began in 2020 making this a non-adjusting event for most entities. However, judgement should be exercised and the reporting date and specific conditions of each entity must be considered in making this assessment.

If we look at guidance provided from regulators in other jurisdictions, the Financial Reporting Council in the UK provided an update in March 2020 stating that “there is a general consensus that the outbreak of COVID-19 in 2020 was a non-adjusting event for the vast majority of UK companies preparing financial statements for periods ended 31 December 2019”.   

The standards provide that with respect to non-adjusting events, whilst an entity is not required to adjust the amounts recognised in its financial statements, if the effects of the events are material they still need to be disclosed in the financial statements. An entity shall disclose the nature of the event and an estimate of its financial effect or a statement that such an estimate cannot be made.

Going Concern

IAS 1: Presentation of Financial Statements / GAPSME Section 3: Concepts and pervasive principles

Both standards require management to assess, at least the first twelve months from the balance sheet date, a company’s ability to continue as a going concern up to the date the financial statements are issued. IAS 10 also touches up on going concern issues arising after the balance sheet date. IAS 1 and GAPSME also provide that management is required to disclose material uncertainties which may cast significant doubt on the entity’s ability to continue as a going concern as soon as it becomes aware of such. An entity shall not prepare the financial statements on a going concern basis if management intends to (or has no alternative but to) liquidate or cease trading.

It is becoming increasingly likely that many entities, particularly those in sectors which have been critically hit by the outbreak (such as wholesale and retail activities, hospitality, tourism and transport), will face issues that need to be considered carefully by management in their going concern assessment. In doing so, there are a number of factors which must be taken into account such as government grants, supplements and assistance, any financing required by the company, restrictions on travel and movement including for employees, the financial situation of suppliers and customers and the effects that all this may have on future profitability and liquidity of the entity.

Other considerations

There are various other specific areas within accounting which might impact individual entities, such as:

• Fair value measurement (IFRS 13 / GAPSME Section 9);
• Impairment and recoverability of financial and non-financial assets (IAS 36 / GAPSME Section 12. Impacts on IAS 16, 28, 38 & 40 and GAPSME sections 7-11 should also be considered);
• Valuation of inventories, particularly those measured at the lower of their cost and net realisable value (IAS 2 / GAPSME Section 15);
• Measuring expected credit loss assessments in line with IFRS 9 ;
• Recognition of government grants (IAS 20 / GAPSME Section 13).

Relief granted by regulators

The following are some of the measures which may assist entities impacted by the outbreak. At the time of writing, some relief measures provided by the Government of Malta together with local regulators include:

Deadline extensions

• Extension of Micro Invest application submission deadline from 24^th March 2020 to 30^th April 2020;
• Extension of the 2020 Risk Evaluation Questionnaires (REQ) submission deadline from 30^th March 2020 to 4^th May 2020;
• Extension of submission of audited financial statements to the Malta Gaming Authority (MGA) with financial years ending between December 2019 and March 2020 to the end of October 2020. Licensed entities are still required to submit unaudited accounts by not later than 180 days following the end of their financial year-end;
• Extension of some deadlines for submissions to the Malta Financial Services Authority (MFSA) falling due by March or April 2020.

Deferrals / penalties

• Deferral scheme of certain taxes (provisional tax, employee taxes, maternity fund, payments and social security contributions, social security contributions of self-employed persons and value added tax) which fall due in March and April 2020;
• Penalties incurred following the non-filing with the Malta Business Registry (MBR) of the annual return and/or financial statements falls within the period of 23^rd March 2020 and 31^st May 2020 will not be imposed if these are filed by 31^st July 2020.

Other financial assistance

• Grant for businesses who have employees on mandatory quarantine;
• Wage supplement to cover basic wages to address the disruption caused by the outbreak;
• Grant for employers facilitating teleworking by investing in technology enabling teleworking, which partially covers these costs (Deadline 8^th May 2020);
• Maltese Government Subsidy of interest rates on working capital loans;
• Moratorium on loan repayments for borrowers who have been negatively affected by the outbreak.

About the Author

This article has been authored by Timothy Hampton, Assistant Accounts Manager.

CSB Group can provide assistance in assessing the various accounting implications on our clients’ financial reporting, as well as with the application for any assistance offered by the government or regulators. Please contact our accounting team on [email protected].