Implications of Coronavirus on financial reporting under FRS102

Luke Shacklock from Page Kirk’s audit team looks at how year-end financial statements are impacted by the Covid-19 pandemic.

As businesses across the UK prepare their year-end financial statements to be distributed to shareholders, several concerns will unquestionably be raised as to how the current worldwide pandemic will affect the information they are required to report. Several factors must now be considered by businesses when preparing their annual accounts under FRS102:

Going concern

One of the overarching principles in the preparation of accounts for entities within the scope of FRS102 is the 'going concern' principle. For companies involved in sectors significantly affected by COVID-19, such as tourism and leisure, there is particular significance to associated disclosures regarding the entity's ability to continue as a going concern. Management must consider all available information that may indicate the business' probable future performance up to at least 12 months from the date the financial statements are authorised for issue.

Adjusting or non-adjusting balance sheet events?

Section 32 of FRS102 requires that the financial statements at the end of the reporting period are inclusive of all events that occur between the balance sheet date and the date of authorisation for issue of the accounts, which indicate conditions that existed at the balance sheet date. For companies with a year-end of 31 December 2019, the effects of the coronavirus were not publicly known despite the initial cases being reported in China; as a result, the conditions did not exist at the year-end, so any effects of the coronavirus on a business' performance are non-adjusting events for financial reporting under FRS102. For companies with year ends in the early part of 2020, much greater consideration will need to be given to the timeline of events up to the date of the balance sheet.

Non-adjusting post-balance-sheet events that are material must, however, be disclosed in the financial statements by way of a note, despite the conditions not existing at a December year end. Businesses will need to carefully consider their own circumstances to determine whether the coronavirus pandemic is likely to have a material effect on their future performance. Considerations may include the effect on the reliability of the supply chain, customer confidence, and the effect on their own covenants with lenders. The disclosure should detail an estimation of the financial effects or a statement that such an estimation cannot be made.

For year ends in 2020, where post-balance-sheet, Covid-related events may become adjusting events, it is important to give consideration as to the effect of assets and liabilities measured at fair value. The FRC has suggested care be taken in impairment reviews of assets, and also in relation to the existence of onerous contracts – all the losses for which must be accounted for at the time the contracts become onerous. More subjective areas should be considered, such as whether a downturn in profitability may affect the recoverability of deferred tax assets.

The directors' and/or strategic report

The FRC has issued guidance on incorporating details of the pandemic into the directors' and/or strategic report, stating that all entities should consider whether the effects are significant enough on their own position to constitute a principle risk and uncertainty. Where possible, the FRC suggests that any mitigating actions are reported alongside the risk of the description itself.

With financial reporting requirements under increasing scrutiny in the light of recent large corporate bankruptcies, it is more important than ever to ensure your financial statements are comprehensive in disclosing everything required by the Companies Act and the accounting standards. At Page Kirk we can offer extensive experiencing in meeting your financial reporting requirements to give you peace of mind that your information on the public record is accurate and complete.

For more information, please contact 0115 955 5500 or email enquiries@pagekirk.co.uk