From the IFRS Institute – May 29, 2020
COVID-19 has taken a toll on US businesses, with many financial reporting implications. From goodwill impairment to expected credit losses for receivables, rent concessions and onerous contracts, IFRS® Standards preparers in the US are busy revisiting their accounting conclusions and required disclosures. The CARES Act passed in March with stimulus measures such as loans, payroll tax deferrals and credits, and new NOLs carry back possibilities. Those also raise numerous accounting questions. In this article, we summarize potential IFRS Standards implications for your company, to help you navigate these uncertain times.
Background
KPMG has been following how current events are affecting specific financial reporting areas and how the International Accounting Standard Board, FASB and SEC are responding to the current situation. Our guidance is revised frequently. To keep abreast of changes, visit our Coronavirus resource centers for US GAAP and for IFRS Standards.
Below, we compile the potential IFRS Standards accounting and disclosure implications of COVID-19, and provide links to more detailed KPMG articles to help you understand and discuss the actions management can take now.
Long-lived assets and leases
| Impairment | The effect of COVID-19 on business operations and the uncertainty of the economic environment may trigger companies to perform impairment testing for long-lived assets such as property, plant and equipment, intangible assets and goodwill. Testing may be necessary even for companies that have had substantial headroom in the past. They may have to reassess forecasts, working capital positions, and discount rates. Read more here. |
| Borrowing costs | Capitalization of interest is suspended during extended periods in which active development of a project is interrupted. Read more here. |
| Lease assets | A lessee’s right-of-use (ROU) assets may be impaired if the asset groups to which they belong are impaired. Impairment testing of ROU assets has similarities with impairment testing of other nonfinancial assets; however, additional considerations apply. Read more here. |
| Rent concessions | Many lessees are receiving rent concessions from their lessors to mitigate their economic burden. The IASB Board has provided an optional exemption to lessees not to apply lease modification accounting to reductions in lease payments due on or before June 30, 2021 as a direct consequence of COVID-19. Read more here. |
| Lease renewal, termination or purchase options | Lessees may also have to remeasure lease assets and liabilities due to potential changes in their assessment of whether it is ‘reasonably certain’ that renewal, termination or purchase options in their lease contracts will be exercised. Read more here. |
Financial instruments
| Expected Credit Loss (ECL) assessment | ECL measurements incorporate forward-looking information available without undue cost or effort at the reporting date. These forecasts may be particularly challenging to do for the economic effect of COVID-19. Read more here. Along the same lines, companies will find it challenging to address the significant increase in credit risk (SICR) assessment because of COVID-19. Read more here. While SICR may be material for banks and other financial institutions, credit losses are not just an issue for banks. Corporates have to recognize ECLs on trade receivables, and other financial assets like loans to customers or finance lease receivables, etc. Read more here. |
| Hedge accounting | While companies are trying to manage their risk exposure due to COVID-19, there are also changes in how a company applies hedge accounting. Forecast transactions designated as hedged items in cash flow hedges may not be highly probable any more. The effectiveness of the hedge and whether the hedging relationship must be discontinued may also have to be reevaluated. Read more here. |
| Own use exemption | A contract to buy or sell a nonfinancial item – e.g. commodities such as crude oil or metals – may no longer qualify for the own use exemption, and may have to be accounted for as a derivative at fair value through profit or loss. Read more here. |
| Debt modification | Many borrowers have sought concessions from lenders on their current borrowing terms – e.g. covenants, maturity, interest rate, etc. There are accounting effects to renegotiating terms, which may range from modification to extinguishment of the debt. Read more here. |
| Current and non-current classification of debt | The deterioration of operating results may lead to companies breaching their debt covenants or triggering subjective covenant clauses, resulting in the debt being repayable on demand. The company may need to classify the liability as current in such circumstances under IFRS Standards. This evaluation may be complex and require judgement. Read more here. |
| Fair value | Determination of fair value may become challenging due to the economic uncertainty brought on by COVID-19. Any fair value determination should appropriately reflect risks and market conditions at the measurement date. If unobservable inputs have become significant, it could result in a Level 3 categorization and additional disclosures may be required. Read more here. |
Financial statement presentation
| Events after the reporting date | Subsequent events occurring before the financial statements are authorized for issue can be adjusting or non-adjusting events. Read more here. |
| Going concern | Management needs to confirm the company’s ability to continue as a going concern, including its ability to meet its obligations when they fall due, for at least 12 months after the reporting date. This assessment requires rigor and could be more challenging in light of the potential liquidity shortfall caused by the general economic downturn. Read more here. |
| Interim financial statements | Preparation of 2020 interim financial statements will likely involve additional considerations because investors and other users may expect information above and beyond what is typically disclosed. Read more here. Also read our IFRS Perspectives article Interim financial reporting: IFRS® Standards vs. US GAAP. |
Income taxes
| Deferred tax assets | Future income and tax projections are affected by COVID-19, which in turn may also affect the realizability of deferred tax assets. Read more here. |
CARES Act
| Government grants and assistance | IFRS Standards have specific guidance for government grants (IAS 20) that applies to many provisions in the Act, such as certain sector grants or payroll tax credits. It is key to determine when and how the benefits of the aid can be recognized and presented. Other aspects of the Act (loans, guarantees, etc.) may also be subject to other accounting guidance. Read more here. Also read our IFRS Perspectives article Government grants: IFRS compared to US GAAP. |
| Income tax relief | The Act was enacted on March 27 and provides various forms of income tax relief such as additional carryback opportunities for net operating losses (NOLs), temporary increase in the interest deductibility threshold, etc. Read more about the CARES Act here. |
Revenue, inventory and insurance proceeds
| Revenue recognition – enforceability of the contract | Contracts with customers may have to be reassessed for enforceability. The COVID-19 economic situation has introduced uncertainty about whether the terms of a customer contract are still enforceable and revenue can still be recognized. Read more here. |
| Revenue recognition – estimates | Estimates and judgements made under IFRS 151 may require revision. For example, changes in variable consideration, stand-alone selling prices, measures of progress, etc. may affect the amount and timing of revenue recognition. Read more here. |
| Revenue – cycle assets | Recoverability of assets, such as receivables, contract assets, inventories and other capitalized costs, may have to be reassessed. Read more here. |
| Insurance proceeds | Companies may be entitled to insurance coverage for certain losses from disruption to supply chains, claims from third parties, etc. Recognition of related reimbursement, in the form of insurance proceeds, may require some key judgements. Read more here. |
Employee benefits and provisions
| Employee benefits | Market turbulence and changes to compensation policies and strategies are affecting the estimation and measurement of compensation expenses. Read more here. |
| Restructuring provisions | Businesses are resorting to furloughs, downsizing or discontinuing certain operations. Those plans may lead to a restructuring. IFRS Standards specify when related costs (e.g. employee or contract termination costs) should be recognized as a provision. Read more here. |
| Provisions | Existing customer or sourcing contracts may become loss-making. Penalties, litigation, including medical claims from employees, could be on the rise. Companies need to consider the provisions guidance in IAS 37, especially that for onerous contracts. Read more here. |
The takeaway
All companies should consider whether the macro- and micro-economic effects of COVID-19 induced uncertainties will affect accounting conclusions. Standard setters have already provided some relief, but the CARES Act by itself opens up new accounting policies to be made and documented. This extra effort comes at a time when finance and accounting departments are also facing operational challenges due to virtual closes and remote working.
Our US GAAP and IFRS Standards resources will help you to better understand the potential accounting and disclosure implications of COVID-19 for your company, and the actions management can take now.
Contributing authors
Footnotes
- IFRS 15, Revenue from Contracts with Customers
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The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
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