The COVID-19 crisis also leads to numerous questions with regard to accounting as of 31 December 2019. The recent development affected almost all companies and company groups required to keep accounts. Against this background, we prepared Q&A concerning accounting according to German Commercial Law [Handelsgesetzbuch-HGB] and IFRS for you.
Are impairments or provisions due to the expected results of the COVID-19 crisis to be recorded already in the annual or consolidated financial statements as of 31 December 2019?
This would only be admissible or required if those events were considered value-enhancing events instead of value-justifying events. Although the first cases of the disease incurred as early as December 2019, it can be assumed that the global spread as the main reason for the current economic impact did not occur until January 2020 and therefore after the 31 December 2019. Accordingly, it may generally be assumed that the occurrence of the coronavirus is to be classified as a global danger and that the consequences for the balance sheet will only be taken into account in financial statements with a cut-off date after 31 December 2019.
IFRS accounting: Do the consequences of the COVID-19 pandemic classify as an adjusting event within the meaning of IAS 10?
In this regard, the above comments on annual or consolidated financial statements according to German Commercial Law as of 31 December 2019 apply accordingly. Hence, the consequences of the global spread of the COVID-19 pandemic are to be classified as a non-adjusting event and not to be taken into account in the IFRS consolidated financial statements as of 31 December 2019.
May the (consolidated) financial statements as of 31 December 2019 still be prepared on the basis of the going concern assumption?
A deterioration in the net assets, financial position and results of operations after the balance sheet date may be an indication that it is necessary to review whether the preparation of the (consolidated) financial statements is still appropriate under the going concern assumption. In extreme cases, the spread of the virus may have such a significant negative impact on the business activities of the company that the accounting principle of continuing operations (going concern premise) can no longer be maintained.
However, if the going concern assumption is maintained, it must be assessed whether there is nevertheless a material uncertainty in connection with events or circumstances that could cast significant doubt on the company's ability to continue as a going concern ("going concern risks"). In this case, a report must be made in the (consolidated) financial statements and the (group) management report; please refer also to question 5.
Whether and to what extent currently foreseeable support measures and the legal provisions planned by the governments of the respective states or the Federal Government (e.g. the relaxation of the insolvency regulations as planned by the Federal Government) are to be included in the assessment of the going concern assumption, is to be evaluated on a case by case basis under consideration of the status quo of the respective legislative procedure.
Are there any implication for the notes to the (consolidated) financial statements?
As developments around the coronavirus are classified as value-justifying after 31 December 2019 according to the above considerations, a subsequent report on this is to be made in the (consolidated) notes to the financial statements, if a "matter of particular importance" exists. According to German Commercial Law, the nature and financial effects of the transaction of particular importance, which are not included neither in the (consolidated) statement of profit and loss nor in the (consolidated) balance sheet, must be disclosed.
The same applies to accounting according to IFRS. According to IFRS, if a non-adjusting event is material, an estimate of the financial effects or the fact that such an estimate is not possible must also be disclosed in the notes to the (consolidated) financial statements.
Are matters to be disclosed in the (group) management report?
The current developments will in many cases be reflected in the forecast and risk report included in the (group) management report.
Within the forecast report, the company may apply the following simplification, as an exception, when special circumstances lead to an unusually high degree of uncertainty with regard to future developments due to general economic conditions and therefore significantly impair the ability of companies: Instead of point, interval or qualified comparative forecasts, only comparative forecasts or the presentation of the expected development of the financial and non-financial performance indicators used for internal management in various future scenarios, stating their respective assumptions, shall suffice.
In principle, a reporting obligation exists in the risk report if the possible further developments could lead to negative deviations from forecasts or targets of the company, and this constitutes a significant risk. A quantification of the risk is required if used for internal management and if the quantitative matters are significant for the reasonable user. In particular, risks threatening the existence of the company must be reported, if necessary by reference to the corresponding information in the financial statements.
Could delays in the reporting of subsidiaries mean that they need not be included in the consolidated financial statements?
According to the German Commercial Code, a subsidiary need not be included in the consolidated financial statements by way of full consolidation if, among others, the information required for the preparation of the consolidated financial statements cannot be obtained without unreasonably high costs or unreasonable delays. The effects of the spread of the corona virus may in individual cases meet the requirements for an unreasonable delay if the so-called "reporting packages" cannot be delivered to the parent company or can only be delivered with a considerable delay, and if no suitable extrapolation of already available financial information is possible and no preliminary figures are available. The use of the consolidation option must be justified in the notes to the consolidated financial statements.
Within the framework of IFRS accounting, there is no explicit consolidation option comparable to these provisions. At most, the waiver of full consolidation may be considered here in accordance with the principle of materiality. If this is not practicable, postponements are unavoidable.
Most companies are currently preparing their annual and consolidated financial statements as of 31 December 2019. There are no consequences for the balance sheet as of 31 December 2019 resulting from the COVID-19 crisis in 2020, however, the crisis requires comprehensive reporting in the notes to the (consolidated) financial statements and the (group) management report.
We are happy to support you in all matters concerning the presentation of the impact of the COVID-19 pandemic in the (consolidated) financial statements and in the (group) management report.