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Effects of the corona pandemic on the IFRS financial statements as of December 31, 2020

The corona pandemic has become our daily companion since March 2020 and is now once again creating challenges for both the authors and the auditors with a view to the IFRS annual and consolidated financial statements as of December 31, 2020. In contrast to the financial statements with reference dates before the outbreak of the pandemic, when COVID-19 was usually taken into account in the supplementary reporting in the (Group) notes and in the risk and forecast reporting in the (Group) management report, there may now also be effects on the Valuation of assets and liabilities. The type and extent of the effects depend largely on the individual situation of a company or a group of companies. As a consequence, additional information may also be required in the (group) notes.

In this article, we first give a brief overview of possible IFRS accounting topics that need to be recognized in the context of the corona pandemic. With a view to the focus of the audit for 2021 published by the FREP at the beginning of November, we then focus our attention on the assessment of the impairment of assets in accordance with IAS 36.

Overview of possible IFRS accounting topics due to COVID-19
  • Assessment of going concern (IAS 1)
    • Disclosure of uncertainties with regard to going concern (IAS 1.25) in the notes
  • Revenue recognition (IFRS 15)
    • Changed assumptions about variable consideration (IFRS 15.59)
    • Probability of receiving the agreed consideration in the event of a significant deterioration in the customer's creditworthiness (IFRS 15.13)
  • Impairment of assets (IAS 36)
  • Fair value assessments (IFRS 13)
    • Relevant for a large number of balance sheet items, including Financial instruments (IFRS 9)
    • Influence on the evaluation hierarchies / parameters
    • Level 3 fair values ​​(own determination based on parameters derived from models) must not contradict market conditions (IFRS 13.89)
  • Financial instruments (IFRS 9)
    • Adjustments in the context of fair value assessments possible (see IFRS 13)
    • The expected credit losses (stage 1-3) must be determined holistically (IFRS
    • When using a commission matrix, the expected failure rate may have to be increased
    • If contractual adjustments are made, the regulations of the modifications must be observed (IFRS
    • It must be checked whether existing hedging relationships still meet the necessary criteria of high probability and effectiveness
  • Provisions (IAS 37)
    • Check whether there are matters requiring provisions such as restructuring measures (IAS 37.70) or impending losses from pending transactions (onerous contracts) (IAS 37.68) are available
    • A holistic check must be made here - an obligation to apply only arises if the measure can no longer be unilaterally evaded
  • Income taxes (IAS 12)
    • Recoverability of deferred tax assets on loss carryforwards (IAS 12.34ff.)
  • Assets held for sale / discontinued operations (IFRS 5)
    • Separate balance sheet / additional information in the notes if a sale is highly probable (within 12 months)
  • Leases (IFRS 16)
    • Use of facilities for accounting for COVID-19-related lease facilities such as B. Deferrals and waivers
  • Government grants (IAS 20)
  • Inventories (IAS 2)
    • No inclusion of idle costs in the production costs (IAS 2.13)

During the first Corona wave in March, the Institute of Auditors (IDW) published its technical information on the subject of "Effects of the spread of the Corona virus on accounting and its auditing (Part 3)", which we would like to refer to at this point.

Impairment of assets (IAS 36)

For assets that fall within the scope of IAS 36, an assessment must generally be made on each reporting date as to whether there could be reasons for an impairment. With a few exceptions, the scope of application includes B. Inventories, deferred tax assets and financial assets according to IFRS 9, all assets. Are clues (so-called."Triggering events") identified for impairment (IAS 36.9) in a second step, an impairment test must be carried out for the assets affected. An exception applies to goodwill and intangible assets with an indefinite useful life. Irrespective of the existence of a triggering event, these must generally be subjected to an annual impairment test.

According to IAS 36.12, there may be indications of an impairment from external and internal sources of information such as B. the lack of expected cash flows or specific indications from internal reporting on the deteriorated profitability of an asset. The developments currently observable in the course of the corona pandemic could represent an external source of information that could provide indications of negative consequences for the entire company or the current or future area of ​​application of a specific asset. We assume that the developments triggered by the pandemic will represent a rebuttable assumption for the majority of companies, indicating the existence of an impairment.

An impairment must be recorded if the current book value is greater than the recoverable amount ("Recoverable amount") is. In accordance with IAS 36.18, the latter results from the higher of the fair value less costs to sell ("Fair value less costs of disposal") and the value in use ("Value in use"). The fair value is the value that the company would receive in the event of a sale. The value in use reflects the present value of the future surplus payments that can be generated through the use of the asset. Planning calculations regularly serve as the basis for its determination. In view of the uncertainties triggered by the corona pandemic, however, companies are urged to take a critical look at the premises on which the planning is based. Previously used plans are to be questioned and revised if necessary. In particular, the updating of data from the past should be viewed critically.

Can assumptions be maintained for planning periods further in the future that were made before the outbreak of the pandemic?

Even if the current reports of success in the development of a vaccine give hope for an effective fight against the corona pandemic, the question must also be asked whether assumptions for planning periods further in the future that were made before the outbreak of the pandemic can be maintained. The issues of disruptive innovations and changes to business models are playing a more important role than they did in previous years. In addition, it should also be taken into account that previously existing supplier and / or customer relationships may be affected, e. B. because companies have adjusted the alignment of their business models or may no longer be on the market at all. In general, the rule here also applies that planning becomes more difficult and the more discretionary it is the further into the future one looks. If necessary, it can therefore be useful to model different scenarios.

To determine the capitalization interest rate required to determine the present value, regular capital market data based on a group of comparable companies are required. With regard to the composition of the underlying group, it must be assessed whether adjustments will be necessary due to the corona pandemic.

Our IFRS experts will be happy to advise you on these and all other questions relating to IFRS financial statements, such as B. the

  • Preparation of statements / reports as evidence for the auditor and / or the FREP
  • Creation of company evaluations, as the basis of your creation
  • Preparation of complete IFRS financial statements
  • Execution of impairment tests
  • Implementation of IFRS workshops also on individually selected topics
  • Support in corporate planning

Many thanks to my co-author Nicole Morgenstern.