To guide auditors, chartered accountants as well as the general public, the Financial Reporting Council of Nigeria issued a statement on COVID 19 and its impact on audit of Reporting Entities in Nigeria; the Institute of Chartered Accountants of Nigeria (ICAN) also conducted a webinar series on Potential Accounting and Disclosure implications of COVID 19 on the financial statements of companies.

Below are some of the key areas addressed that companies may need to consider in the 2019-2020 financial statements. Whether they are relevant depends on the company’s specific circumstances – i.e. the nature and extent of COVID-19 impacts on the financial position, performance and cash flows of the company.

For 31 December 2019 financial statements, the financial reporting effects of the COVID-19 outbreak are generally non-adjusting events (with the exception of going concern) because the significant changes in business activities and economic conditions occurred as a result of events arising after the reporting date – e.g. actions taken by governments, MDAs and the private sector to respond to the COVID-19 outbreak.

If management determines that developments after 31 January 2020 are adjusting events, then this will probably be a significant judgement that would require clear disclosure, including the reasons why management concluded that these developments are adjusting events. The possible areas that would be affected are highlighted and discussed below.

Management’s going concern assessment may be significantly affected by the current circumstances. If there is a material uncertainty about the company’s ability to continue as a going concern at the date on which the interim financial statements are authorized for issue, then that uncertainty is disclosed in those interim financial statements. This is the case irrespective of whether it was disclosed in the most recent annual financial statements.

Reviews for indicators of impairment and any resulting tests for impairment of non-financial assets are performed at the interim reporting date in the same manner as at the annual reporting date.

Companies are required to review the residual value and the useful life of an asset at least at each financial year end. Given the current economic conditions, companies need to reassess those estimates during the interim period if the usage or retention strategy for these assets has changed. As per accounting standards, useful life and residual life of Property, Plant and Equipment need to be revised annually. For example, due to the pandemic, asset values might have diminished in value due to lack of routine maintenance, there is also a higher chance that PPE can remain underutilized or not utilized at all for a certain period of time. It is important to note that as per accounting standards, depreciation needs to be charged even if PPE remains idle.

The business entity needs to review the residual life and useful life of an asset as they might have been impacted due to COVID-19. Hence, if there are any changes from previous estimates, such changes need to be accounted for.

Companies apply the same criteria when testing for impairment of financial assets as those at its annual reporting date. If a company recognizes a material impairment loss on financial assets, then it provides in its interim financial statements an explanation of and an update to the relevant information included in the last annual financial statements. IFRS 7 Financial Instruments: Disclosures provides relevant disclosures to be considered in this regard. Measuring Expected Credit Loss assessments (ECLs) under IFRS 9 Financial Instruments, particularly for financial institutions, COVID 19 could be a trigger for significant increase on credit risk arising from exposure to borrowing parties in highly affected sectors of the economy.

IAS 2 Inventories requires a company to measure its inventory at the lower of cost or net realisable value and update its estimate of the net realisable value at the interim reporting date. The COVID-19 outbreak may affect this estimate. Net realizable value is the net amount that a business unit expects to realize by selling inventory during the ordinary course of business. In other words, the net realizable value is equal to the estimated selling price less estimated cost of completion and sale. Due to the closure of production units and consequently the reduction in the normal production capacity, it would become necessary for the business units to write down inventories to ‘Net Realisable Value’.

While determining the amount of revenue to be recognized, factors like increase in sales return, decrease in volume discounts, higher price discounts, etc due to COVID-19 need to be considered. In addition to this, some firms may have postponed the recognition of revenue due to increased uncertainty of collection as a result of COVID-19. Thus, they need to disclose the circumstances in which revenue recognition has been postponed.

As the impacts of the COVID-19 outbreak continue to evolve, capturing events that relate specifically to conditions that existed at or before the reporting date – i.e. adjusting events – will require careful assessment. To do that, companies need to carefully assess their specific facts and circumstances to identify events that generally represent the culmination of a series of conditions that existed at or before the reporting date.

As a result of COVID-19, some entities may breach loan covenants leading to an increase in liability, as well as liability, becoming current. However, if the lender agrees after the reporting period but before the approval of financial statements that the payment of such loans demanded by him was not a consequence of the breach of the contract, then such liability would not be taken as a current liability.

Entities need to disclose assumptions made about the future as well as the estimation of uncertainty that may have a significant risk of adjusting the carrying amount of assets and liabilities in the next financial year due to COVID-19.

In many cases, 2020 budgets and forecasts prepared in 2019 may now be of limited relevance given the rapidly changing economic and business circumstances. These may require significant revision – e.g. for forecast sales, gross margins and changes in working capital – to be able to support management’s assessment in the current environment.

In conclusion, owing to the impact of COVID-19 on the financial position and performance of entities, the entities need to make adequate disclosures and give explanatory notes regarding the impact of COVID-19 on its financial position, performance and cash flows. This should be undertaken in order to enhance the quality of financial statements for comparability.

Management of Companies and external auditors need to take initiative now, re-strategize and reflect and combat the impact of COVID 19 on the Financial Statement and otherwise.