With the Coronavirus now a pandemic, it is important that Maltese businesses consider the accounting implications of the impact that this crisis is having on their operations.
Is the impact of the Coronavirus an adjusting event in the 31 December 2019 year-end financial statements?
Entities should consider IAS 10 “Events after the reporting period” to determine whether the impact of the coronavirus is an adjusting or a non-adjusting event.
IAS 10 describes an adjusting event as one which ‘provides evidence of conditions that existed at the end of the reporting period’. In our view, the development and spread of this virus happened in 2020 and does not provide evidence of a condition that existed as of 31 December 2019 and therefore is a non-adjusting event. On 31 December 2019 there were few reported cases and little confirmed evidence of its spread amongst the human population.
Entities need to ensure that the measurement of their assets and liabilities at 31 December 2019 is not impacted by the subsequent development of the virus. For instance, the measurement of expected credit losses and hedge effectiveness in accordance with IFRS 9 ‘Financial Instruments’, the measurement of impairment of intangible assets such as goodwill under IAS 36 ‘Impairment’, and assets and liabilities that are measured at fair value in accordance with IFRS 13 ‘Fair Value Measurement’. Entities should also consider IAS 2 ‘Inventories’ because if they have reduced or idle capacity, the overhead costs may not be allocated to inventory as they usually are (i.e. any downtime should not be included in the cost of inventory). The realisation of deferred tax assets under IAS 12 ‘Income Taxes’ should also be considered.
If the impact of the non-adjusting event is material to the financial statements, it should be disclosed. This disclosure should include the nature of the event and an estimate of the financial effect, or if it is not possible to estimate this, a statement to that effect.
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