Impairments, liability classification and going concern - high inflation and interest rates, volatile commodity markets, fluctuating foreign exchange rates and other macroeconomic factors have contributed to an economic downturn in many countries. Consequently, asset impairments are likely to occur more frequently. Apart from the general impairment model under IFRS, some assets such as financial instruments, inventories and investments in associates and joint ventures are subject to specific recognition and measurement requirements of impairment losses. Also, companies may need to recognize additional liabilities associated with onerous contracts.
The effects of the economic downturn may impact a company’s ability to meet the covenant requirements included in long-term loan arrangements and, therefore, the assessment of whether its liabilities are current or non-current may be impacted. When a company breaches a covenant on or before the period end with the effect that the liability becomes repayable on demand, it is classified as a current liability unless a waiver is obtained before period end which effectively rectifies the breach so that the loan is not repayable within 12 months from period end.
The current economic environment could have a significant negative impact on a company’s financial position and performance and, hence, affect the appropriateness of the going concern assumption. Disclosures are required when the going concern basis is not used or when management is aware, in making the assessment, of material uncertainty related to events or conditions that may cast significant doubt upon the company’s ability to continue as a going concern. Disclosures are also required when the judgement applied in determining the existence of a material uncertainty is significant.
Consideration of climate change matters - in recent years, there is increasing pressure for companies to communicate a clear commitment to reduce their impact on the environment. Such disclosures are often found in the annual report, and they tend to attract significant attention from investors, regulators and other stakeholders.
One common pitfall that companies need to avoid is the assumption that climate-related disclosures are not mandatory under IFRS. While there is currently no single explicit standard on climate-related matters in IFRS, climate-related risks and other similar uncertainties may impact a number of areas of accounting. Companies are also required to disclose significant assumptions, estimates and judgements made, which may be related to climate change.