The third cluster of disclosures covers income statements and involves issues such as revenue recognition, cost of sales and alternative performance measures (APMs). Disclosures around revenue are quite varied as they address issues such as rebates, variable consideration and revenue reversal, but also the disclosure of revenue in both pre-COVID-19 and COVID-19 reporting periods.
Costs of sales are affected in various ways: there are incremental costs as a result of prevention measures taken; abnormal and unproductive production costs (e.g. operations well below capacity); and costs of spoilage where finished goods had to be destroyed.
Surprisingly, the EY research indicates that the use of COVID-19-adjusted APMs in the financial statements has been limited. This is likely due to the regulators’ call for caution before using APMs to disclose the impact of COVID-19.
The final cluster of disclosures concerns financial instruments, which includes loan modifications, loan covenants, hedge accounting, expected credit losses, liquidity, concentrations of risks and related judgments and estimates. Financial institutions provide the most extensive disclosures about these issues, but the pandemic has impacted most companies beyond their ordinary worst-case forecasts for 2020 and so disclosures have been seen more widely.
For example, an entity disclosed that its forward exchange contracts were no longer highly effective and that hedge accounting on these items had been discontinued, as foreign revenue was lower than expected. Another entity also referred to the general processes that it undertakes for expected credit losses (ECLs) in a “normal” environment with additional specific areas that have been considered this year and explained how its assessment of the ECL rate changed in various overdue categories.