The Impact of COVID-19 on the Financial Statements of Treasury Operations

May 5, 2020

COVID-19

The economic downturn caused by the global COVID-19 pandemic has had an impact on auditing and preparation of financial statements, even for financial periods ending prior to the emergence of COVID-19.

Auditors will require analysis of the effects of COVID-19 on the activities of the company. Of particular concern is the liquidity of the company and whether there is any material uncertainty that there is enough liquidity in the company to cover twelve months from the reporting date. Consideration needs to be given to the suitability of preparing the financial statements on a going concern basis.

The following aspects of the Financial Statements require disclosures due to COVID-19:

  • Directors’ Report
  • Going Concern Note
  • Subsequent Events Note
  • A separate note on the impact of Covid-19 on the entity may be required.

In preparing the above disclosures and notes to the accounts the key areas requiring focus are:

Expected Credit Losses (ECLs)

Where a company is applying IFRS9 the calculation of Expected Credit Losses (ECLs) will be impacted. Some guidance has been issued in relation to applying IFRS 9 in light of the uncertainty caused by COVID-19. This guidance provides a reminder that IFRS 9 does not set out a mechanistic approach to when lifetime ECLs should be recognised and that IFRS 9 requires and allows entities to adjust their approach to determining ECLs in different circumstances. The negative economic outlook and any cashflow difficulties caused by COVID-19 must be factored into any ECL assessment. This assessment may result in an increase in an entity’s provision for ECLs, e.g. due to higher probability of default and/or a potentially larger loss given default.

Impairment

Even for companies not applying IFRS, impairment reviews and recoverability of assets must be considered with sufficient disclosure and detail of this assessment provided in the accounts.

Hedge Accounting

The company must consider if any qualifying hedges require rebalancing or possibly even discontinuation e.g. in a situation where it may no longer be highly probable that a forecast transaction will take place.

Debt Repayment/Classification of Debt

Any debt repayment deferrals should be evaluated as there may be a reclassification issue in terms of maturity profile. Also debt covenants and related terms and conditions should be carefully reviewed to ensure they continue to be met.

Key Risks

An entity makes disclosures of the various risks being faced, i.e. credit risk, market risk, liquidity risk. Full evaluation of all risks facing a business must be carried out for changes and details given in the financial statements.

For more information please contact our expert treasury accounting team.