How Insurance Works

Coronavirus Crisis (COVID-19): The IFRS Issues Accountants are Facing


Hello everyone, I hope you’re all safe
and well. Welcome to this slightly unusual
recording, brought to you in this format partly because of the
unprecedented times in which we live. We thought it might be
useful if we got in touch with some of our authors
and ask them for their take on how the crisis was likely to affect matters
connected with their specialist subject. An obvious place to start, was the
financial reporting impact of COVID-19. And for that, we turned to Wayne Bartlett,
author of several of our IFRS courses. So, Wayne’s just coming on the line now.
Wayne, hi! Good to see you. Hello Alan, how’s
things? Pretty good, all things being
considered. How are you? You keeping busy?
Yeah, no, I’ve actually been surprisingly busy the last couple of months. And it’s been quite interesting. Because I have a number of clients who I work with internationally. And what I’m finding is that some of them
have adapted to this new normal very well. For example, I’ve recently done some work with an organisation in Turkey.
Developing some auditing kind of approaches and a desk-based study
for them. And I’m about to hopefully do some
work with a client in Vietnam on internal audit. Again, from a distance.
Some other clients have maybe not adapted quite so well. And it’s kind of
interesting to see some coping with this much better than
others. And of course, I’ve been quite busy
preparing the new course on accounting for coronavirus
and that’s been keeping me well occupied.
I saw the course when it came in. It must have been a massive piece of work.
Could you share with people now what you think the main
financial reporting implications of COVID-19 are?
Yeah, okay. I mean the first thing to say is, of course,
everybody will have their own specific challenges which will be,
to some extent, unique to each organisation. But I think
there are a number of key areas which are likely to be
of major concern to a whole host of people regardless of what sector
they’re in. And with this in mind I mean there are certain areas I think which we’ve tried to cover in the course which focus
on some particularly important areas. So things like, accounting for
non-financial assets. You know, there is a significant risk
that some organisations may have assets which have been
quite significantly impaired as a result
of the pandemic and its economic consequences.
There are other obvious areas to do with revenue.
You know, there are certain rules that the new
standard talks about in terms of looking at revenue recognition. And making sure you’re not
too optimistic or over optimistic in the way you recognise
it. Organisations, in many cases, will be getting grants from government.
Another form of revenue recognition. On the other hand, we tend to think these
things are all negative. And for many businesses, this
is a, kind of a, very challenging time. But some businesses may actually do
quite well as a result of the consequences of the
pandemic. So those, for example, involved in
research and development of things like vaccines. They’re on the
opposite side of the equation, if you like.
They may well have accounting considerations to do with more positive
things. So, I think it’s easy to assume, and for many
people this will be desperately challenging times, but for some people
it will go the other way. And you can, as I say, I think you can make some
reasonable estimates about the kind of accounting and reporting areas
that are gonna be particularly significant. Particularly,
for organisations thinking about preparing their financial
statements for 2020 specifically. We hear a lot about the way in which the
crisis has affected different businesses and
different sectors in different ways. Are there any particular sectors that
you think people should bear in mind? And perhaps look to as case studies when
they’re thinking about preparing their own financial reports?
I think there are and, I mean, there are many examples you can actually quote. But
I think one of the really interesting ones
is to do with garden centres. So, here in the UK, for example, we have quite
a vibrant garden centre industry. Which
isn’t covered by our lockdown procedures at the moment.
Most of these shops are not open. And there is a particular accounting
repercussion there. In that, they rely heavily
on selling their stock at certain times of the year.
And the certain time of the year we’re talking about is exactly where we are
now. May, June, those are the times of year
where they have to sell their stock. So they’ve been growing
these plants for some months with the expectation
that they’ll be able to sell them to the public. And all of a sudden for many of
them, they can no longer do that. So, what do
they do with the inventory valuation for those items? You
know, they will have, presumably, in many cases, that inventory
will be valued at cost. Now all of a sudden they
may not be able to get rid of this or very little of their stock. So, then
you have to think, “Okay what’s the net realisable value of
this stock?” “Is it lower than my cost price?” In many
cases, I guess, the chances are, it will.
Therefore, you have to write down the inventory. That’s 1 very specific
example, where, I think, you know, we could be
seeing particular fallout. I mean, another one which is, I think,
maybe of major international significance
are the airlines around the world. You know, these are very
prominent economic players. And collectively, they employ across the
globe hundreds of thousands, if not millions, of people,
directly or indirectly. And all of a sudden you have
pretty much, without exception, every major airline
in the world has been impacted hugely negatively by this year.
I think we can actually say, pretty much, without
exception. So, you have Lufthansa in Germany, which is now,
kind of, being supported by the government to the tune of €12bn. You have British Airways and Virgin
laying off, or potentially laying off, thousands of staff.
And you have very uncertain future revenue flows for these organisations
because the big imponderable is, will the
customers come back? Even when lockdown is lifted? And you
have these hugely expensive assets. The airliners which are owned by, or leased, by the airlines. All of a sudden, maybe we have, or are
gonna have, a lot of airline planes lying around. And again,
we have questions there about, you know, on an ongoing basis
what is the valuation of those airliners? And does it need revision? So, you know, there are 2 very specific sectors. As I
say, there are many others you could quote; cafés,
restaurants. Pretty much across the board this is
going to have a major impact on organisations and the
accounting and financial reporting within those organisations. You mentioned cafés and restaurants and, in many ways, they’re very much like the example you
started with, the garden centre. Because when all this
is over and everything’s back to normal, whatever that might end up being,
we will still need cafés and restaurants and we’ll still visit
garden centres. But, I guess, there’s a question of whether these businesses are
going to be able to bridge the time between now and then?
And still be there? So, in financial reporting terms, that creates a pretty
real going concern issue? That’s very, very much the case. You know, under the IFRS rules, for example, we are required to assess, every year,
whether an organisation is a going concern, or not.
And that basically, put in simple layman speak, is that we are confident
that that organisation will be remaining in business
for the 12 months following the reporting date.
So, you know, in the short-term they will survive.
And if that’s not the case, then we have to look at the way we value our assets
going forward. And that could have a hugely significant
impact on the financial reporting. You know, and and basically will, maybe
in some cases, radically alter the financial statements. And as well as alerting the reader of the
financial statements, “Hang on we think we have a problem.” You know, this
is a very public statement that, actually, we don’t think the going
concern applies. i.e. As a business we do not expect to be
trading beyond the next 12-month period. So that
sends a very difficult, but very clear message, to the reader of
the financial statements which is obviously
a very difficult one to give. Yeah, absolutely. I guess that in one
particular way, all of these businesses have one thing,
at least, in common and that’s what they all kind of operate ‘in the moment’.
If you go to a café or a restaurant, they kind of expect you to pay for
the food that you’ve had before you leave. And if you go to a garden centre, you buy some plants, you pay for them and
then you take them away. There and then. But for a lot of businesses,
there’s a bit of a lag there. Where people make commitments
to pay for things and effectively enter into contracts.
But there may become some doubt about whether they’re going to do that in the
future. And again, that must have issues for
recognition of revenue under financial reporting? That’s very much the case. And it’s a very good example because it impacts, potentially,
on a number of accounting areas. The immediate thing would be the revenue
recognition. So, you have forward contracts. all of
a sudden. The deliverability or the financial
viability of those contracts is under threat.
Therefore, that impacts, potentially negatively, on the amount of revenue
you would recognise. Going on from that, you may have manufactured or made some
items specifically for this contract which you
now don’t have an alternative use for. But, potentially,
that means you have to look at an impairment
of that inventory. Writing that inventory down.
So, there’s another accounting area impacted.
The latest standards on financial instruments,
they require that you look at the collectibility
of outstanding debt and reassess that. And basically the rules are, that if
you think the credit risk has got greater, as a
result of events, then you have to take a more prudent
view of your, kind of, bad debt situation. That impacts.
And that could lead back, as we’ve just discussed,
even ultimately if the situation is extreme to a going concern consideration.
So, here we’ve got at least 4 different accounting
areas impacted by that 1 situation. So, a lot of these things are
interconnected. So, serious stuff to think about. And I
don’t want to depress people, and you did start
by saying that there will be some businesses that are doing well in the
current circumstances. But, inevitably, as soon as we start talking
about the financial reporting implications
we do tend to focus on the areas where there are really difficult
decisions to be made. And difficult decisions that aren’t just
going to be made right now. It’s going to go on for a long time. We have a long
road still to travel, as countries around the world each come out
of lockdown in different ways. And so, presumably, a lot of uncertainty
and a lot of consequences that we can’t foresee yet. Absolutely. Absolutely, yeah. I mean, going ahead it’s really hard to call the future. You know, maybe
even as far as accounting standards are concerned. Maybe we will see
some very specific announcements from the standard setting bodies.
You know, about how to account for this more specifically.
Because this is such a unique situation.
Here in the UK, for example, the Bank of England’s just predicted
that we’re going to have the worst recession for
300 years. But hopefully it will bounce back quite
quickly. That is the optimist view of this.
But it will have some some very significant repercussions on
businesses going forward. And I’ve been struck, Alan,
occasionally, you know, with your own personal observation.
You come across something and you think, wow,
this is extraordinary. And maybe I could just relay a little personal anecdote
which happened to me quite recently. So, I live near
a fairly small provincial airport which has very few scheduled flights. And those
that there are, maybe two or three a week, from low-cost carriers. Last week, I
was going on my allowed daily exercise
and I walked past this local airport and I couldn’t believe my eyes because
there, parked up on the runway, there were, I counted, around 40
British Airways planes. Including jumbo jets,
which I didn’t even know my my local airport was big enough to take.
And that was a real, kind of, symbolic moment for me. That there’s
all these expensive assets lying around, literally doing nothing. Mothballed on
the tarmac. I subsequently found out, they were down
at my local airport because Heathrow Airport, the main airport
for British Airways, is literally full. There are every single
British Airways’ plane virtually is now at Heathrow.
And it’s full up. It’s like the car park is full, we need the over spill.
Yeah, that’s interesting. Because we kind of imagine that the airports are all
empty, because we’re not there. But in fact,
they’re all full of grounded planes.
Exactly. And of course, the financial impact of that is really significant because the planes
are there but they’re not doing anything. And these are expensive assets which
need to be earning money for airlines and they’re not currently doing it.
Well, that’s a sobering note to finish on. Perhaps we
could ask people if they notice things as they go about
their daily lives that bring home some aspect of the crisis. Or
the financial reporting implications for their business, they should let us know.
It remains for me to say thank you, Wayne Bartlett, for your thoughts and time
today. It’s been illuminating as always. And thank you all for watching. We’ll be
back talking to another accountingcpd author very soon.


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