Government relief measures and going concern basis

In a first article, we provided answers to the most current questions in connection with (group) accounting with reporting dates as of 31 December 2019.

In this contribution, we will discuss areas of doubt with regard to the consideration of public support measures in the accounting and to reporting on a going concern basis, on the basis of the practice statements published by the Institute of Public Auditors in Germany [Institut der Wirtschaftsprüfer e.V. (IDW)] on 25 March 2020. The main elements of our answers apply to consolidated financial statements and group management reports alike.

May the support measures, which were publicly announced recently by the Federal Government or the state governments, be considered in the accounting as of or after 31 December 2019?

It can generally be assumed that the occurrence of the coronavirus as a global danger is to be classified as value-justifying event occurred after 31 December 2019. Hence, the consequences for the balance sheet of the crisis will only be taken into account in financial statements with a reporting date after 31 December 2019. Therefore, forecasts required for the valuation of asset and liability items (e.g. for the valuation of investments) as of 31 December 2019 are not to be adjusted neither by the impact of COVID-19 nor the relief measures.

However, the distinction of value-clarifying and value-justifying events based on the reporting date principle is omitted when assessing the appropriateness of the going concern assumption and in the reporting of opportunities and risks or forecasts, as applicable, in the management report. Financial statements must be prepared under departure from the going concern assumption even if the reason for the departure did not occur until after the balance sheet date.

Therefore, concrete and reliable statements by the Federal Government or the state governments on the implementation of support measures or the granting of public support services must be taken into account when assessing the assumption of the continuation of the company's operations, the forecasts required for the valuation of asset and liability items, as well as forecasts in the management report as of 31 December 2019 or a later reporting date, even if the necessary legal steps are still pending, as their implementation may be expected.

The same applies with regard to forecasts required for the valuation of asset and liability items for reporting dates after 31 December 2019, provided that the distinction between value-justifying and value-clarifying events is observed. Hence, claims for liquidity support or a subsidy against specific authorities are only to be recorded in the balance sheet as receivables after a binding commitment has been made. Non-repayable grants can be fully recognized in income after their binding approval.

The consideration of the relief measures in the forecasts and in the assessment of the appropriateness of the going concern assumption must be explained in the notes to the financial statements or in the management report, as applicable.

What is to be taken into account if the financial statements can still be prepared on the basis of the going concern assumption, but significant doubt exists?

If the financial statements can still be prepared on the basis of the going concern assumption, but significant uncertainties nevertheless exist in connection with events or circumstances that could cast significant doubt on the ability of the company to continue as a going concern, the preparer of the financial statements must disclose this fact and the planned handling of these risks in the notes to the financial statements. In addition, these going concern risks are to be disclosed in the management report; the notes to the financial statements may refer to this reporting. Companies that do not prepare notes to the financial statements are obliged to include this information below the balance sheet.

What are the consequences in terms of accounting if the going concern assumption is no longer appropriate due to the COVID-19 crisis?

If the going concern assumption is no longer appropriate, the Standard requires a change in the basis of accounting, i.e. the recognition of the net assets as of reporting date under consideration of the expected cessation of business operations. Hence, only assets usable until the management ceases business operations are to be capitalized, and obligations resulting from the departurefrom the going concern assumption are to be included in the financial statements in addition to debts already carried as liabilities. Assets are valued under consideration of the planned disposal.

Is it possible that a conservative accounting approach of the preceding years for the purpose of building up hidden reserves may be changed to a more progressive accounting approach?

A deviation from the principle of consistency in recognition and measurement is only permissible in justified exceptional cases. These justified exceptional cases mainly cover such changes in circumstances which the preparer of the financial statements has not brought about himself or which he cannot otherwise avoid. In general, breaches of the principle of consistency are permissible if they provide a better insight into the asset, financial and earnings situation, if a deviation is necessary in order to pursue tax objectives or with regard to the initiation of otherwise dangerous reorganization measures. As far as the consequences of the coronavirus lead to a considerable impairment of development or even a crisis, an adjustment of the previous balance sheet policy is possible under certain circumstances. Breaches of the principle of consistency must be disclosed in the notes and justified.

What sanctions are threatening if the annual financial statements cannot be prepared or published within the prescribed time limit due to the COVID-19 crisis?

The effects of the coronavirus can cause e.g. loss of accounting personnel or other circumstances resulting in the de facto impossibility to meet the statutory deadlines for the preparation and the disclosure of the annual financial statements according to German Commercial Law.

The German Commercial Code does not provide for explicit sanctions in the event of violations of the preparation deadlines, however, a violation of the preparation periods is punishable by law if the legal representatives have stopped payments, insolvency proceedings have been opened on the assets of the company or the application for opening has been rejected due to lack of assets. According to the prevailing opinion, the criminal offence is not applicable if it is impossible to prepare annual financial statements in a timely manner through no fault of the company.

In principle, violations of the disclosure obligations are sanctioned with a fine. However, in the event of an impediment to comply with the statutory obligations for disclosure through no fault of the company, an application must be made to the Federal Office of Justice for a reinstatement to the previous status. The far-reaching and unforeseeable consequences triggered by the coronavirus should constitute such a hindrance through no fault of one's own.

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COVID-19 and financial statements after 31 December 2019