2. Financial reporting
Since the 2019 financial year end was pre-pandemic, the financial impact of COVID-19 has yet to fully manifest itself in corporate reporting in Asia. The quarterly and half-yearly reporting that takes place over the course of this year will offer more insight into the business and financial challenges companies face and the accounting issues that are likely to arise.
The key accounting issues that have already had to be addressed in quarterly reports for Q1 2020 include:
The full impact of asset impairment on corporate balance sheets is unlikely to be known until the 2020 year-end. Still, updates around asset impairment are likely to feature in quarterly reporting as the year unfolds. Impairments will affect every sector that has a reduced capacity to generate income from its assets, such as aviation, hospitality, manufacturing, retail and real estate. Businesses across many sectors could also see some impairment of goodwill due to the negative or uncertain economic outlook.
A lack of visibility around cash flows will hinder finance teams’ ability to apply valuation models such as discounted future cash flows. Having said that, the companies that have engaged to date appear to be doing their best to put forward a range of scenarios that reflect their best estimates of the likely impact of COVID-19 on cash flows. We do not think that a single cash flow forecast will sufficiently address the level of uncertainty that currently exists in most organizations. The significant judgments and estimates to be made call for appropriate disclosure.
Complicated issues with contract accounting are likely to arise as customers defer orders and construction contracts are put on hold. In South Korea, for example, companies are concerned about the possibility of export contracts being canceled due to the uncertainty in key markets, particularly the US and India. Other contracts that may be modified are loan and lease contracts, where payment holidays may be granted by lenders and lessors. Finance teams can expect to consider the accounting consequences of contract modifications and whether existing contracts should be treated as effectively having been extinguished, with new contracts being issued.
Businesses – especially financial institutions – are likely to suffer credit losses as the economic fallout from the pandemic continues. Increasingly, banks will be expected to make provision for potential bad loans. In March the International Accounting Standards Board issued guidance to companies on the measurement of expected credit losses, emphasizing that IFRS 9 Financial Instruments should not be applied mechanically and that prior assumptions may no longer hold true in the current environment. Given the level of judgement involved in applying IFRS 9 in the present circumstances, transparent disclosures in this area will be critical.
A number of companies are spending significant amounts restructuring their businesses as a result of COVID-19. Furthermore, some have adjusted their business structures to function within the constraints of social distancing. This may raise accounting issues around the timing of recognition of provisions and employee expenses.
The ability of companies in Asia to continue as going concerns has been partly supported by government actions. In China, for example, the Government has provided support to businesses in certain sectors and many of its largest businesses are state-owned. The Singapore Government has introduced many stimulus measures to mitigate the economic impact of the COVID-19 pandemic, such as wage subsidies for employers and low-interest, Government-assisted bank loans for small and medium-sized businesses.
Despite these measures, the crisis will inevitably lead to corporate failures. In which case, the going concern basis of accounting no longer applies. The risk will be greatest for those businesses that were already thinly capitalized before COVID-19 struck.
New revenue models
Some organizations will have developed new revenue models due to COVID-19. For example, they may have developed online subscription services. These services will need to be correctly accounted for to ensure they provide an accurate picture of the organization’s financial health at any given point in time.