2. Impairment assessment
At the end of each reporting period, companies are required to assess whether there is any impairment for nonfinancial assets. An asset is impaired when a company is not able to recover its carrying value, either by using it or selling it.
The adverse impact on companies caused by measures to stop the spread of the disease, such as temporary manufacturing plant closures and travel and import/export restrictions, can be considered an impairment indicator.
When assessing impairment, companies are required to determine the recoverable amounts of the assets. This calculation requires an estimate of expected future cash flows and expectations about variations in cash flows. The forecasted cash flows should reflect management’s best estimate of the economic conditions that will exist over the remaining useful life of the asset.
With the current situation, significant challenges are expected as to whether the forecast of budgets for future cash flows can be supported by subsequent performance. The more the current environment is uncertain, the more important it is for the company to provide detailed disclosure of the assumptions taken, the evidence on which they are based and the impact of a change in key assumptions.
3. Contract modifications
Companies affected by the COVID-19 outbreak may experience cash flow challenges as a result of disrupted operations, higher operating costs or lost revenues. They may need to obtain additional financing, amend the terms of debt agreements or obtain waivers if they no longer satisfy debt covenants. In such cases, they will need to consider whether any changes to existing contractual arrangements represent a substantial modification or potentially a contract extinguishment.
There are also consequences for lenders. Financial institutions, such as banks and insurance companies, are being asked to help borrowers by providing relief on cash-flow obligations. These will be considered contract modifications and will require institutions to think about the measurements of their loan portfolio and expected credit losses. Similarly, real estate companies will have to consider the consequences if they provide relief to lessees on rents.
4. Fair value measurement
Companies are required to measure some of their assets and liabilities at fair value. This is a date-specific exit price estimate based on assumptions that market participants would make under current conditions.
When making assessments and judgments for measuring fair value, the company should consider the conditions and corresponding assumptions that were known or knowable to market participants. The fair value measurement (FVM) impact would depend on the evaluation of whether the severity of the outbreak at the reporting date would have impacted participants’ valuation assumptions at that time.
Companies will also need to consider making related disclosures that could reasonably be expected to influence decisions that the users of general-purpose financial statements would make on the basis of those financial statements. Disclosure may be needed to enable users to understand whether or not the outbreak has been considered for the purpose of FVM. Users should understand the basis for selecting the assumptions and inputs that were used and the related sensitivities.
5. Government assistance and income tax
Part of the response by governments to the coronavirus outbreak has been to introduce support measures for individual industries along with wider economic stimulus packages. These measures include direct subsidies, tax exemptions, tax reductions and credits, extended expiry period of unused tax losses, reduction of public levies, rental reductions or deferrals and low-interest loans.
These will all have an impact on financial reporting. Relief measures may fall within the scope of the standards on income tax, on government grants, on leases or financial instruments and the accounting may be different in each case.
One important factor to consider when accounting for any income tax consequences is whether the government concerned has substantively enacted the relevant law. Companies will need to determine whether changes to tax rates and laws were substantively enacted as of the reporting date. The characteristics of any tax relief or rebates need to be assessed to determine whether they should be accounted for as a reduction to income tax expense or the receipt of a government grant.