While there are obviously more immediate practicable and wellbeing concerns to be addressed during these times, New Zealand’s current Delta-variant outbreak does raise various financial reporting considerations which are important for entities to be aware of. This is particularly the case for entities whose financial year end has passed, but where the annual accounts are yet to be finalised (for example, certain entities with 31 March 2021 and 30 June 2021 year ends).
This Cheat Sheet provides a current overview of key financial reporting considerations in the current COVID-19 context. It also includes a quick checklist to assist entities in highlighting various application areas which may require specific attention. However, first, we have shared some important considerations for those entities still in the process of finalising their previous reporting period’s financial statements.
Entities still finalising their previous period’s financial statements
For those entities where this latest lockdown has occurred between their entity’s previous reporting date, and the signing of the associated financial statements, the question you may have is “Do I need to do anything?”.
The short answer is “Yes, you will need to do something”, the longer answer as to what that actually is will vary from entity-to-entity.
Broadly speaking, there are three key financial reporting areas that entities in this situation should take particular note of:
(i) Events after reporting date (NZ IAS 10)
For reporting dates prior to this latest lockdown in mid-August 2021, where the financial statements are yet to be finalised (i.e. 31 March 2021, 30 June 2021 etc.), this will most likely represent a non-adjusting event (that is, this event does not provide any new information about conditions that existed at reporting date).
This means that:
- The recognition and measurement of balances and transactions will not change, be updated, and/or be revised, and
- Disclosure of this latest lockdown, and its likely potential impacts on the business, will need to be disclosed as part of the entity’s Events after reporting date note.
However, there are several exceptions to the above that entities should take note of. Exceptions apply if:
- As a result of this most recent lockdown, Management now determine that the entity is no longer a Going concern (refer below for further details on the requirements here).
- Upon reflection, but without the use of hindsight, Management believe they have incorrectly applied the required financial reporting standards - i.e. accurately, or completely – refer below for specific comments with respect to asset impairment.
- The most recent lockdown is actually an adjusting event, per NZ IAS 10. Note that this is expected to be extremely, extremely rare, and would only apply to reporting periods that were almost immediately before the date that the delta-variant outbreak was first reported publicly.
(ii) Going concern (NZ IAS 1, NZ IAS 10)
As detailed in B1 below, in situations where an entity ceases to be a going concern between reporting date, and the date that the financial statements are signed, this change is treated as an adjusting event (that is, the financial statements are not prepared on a going concern basis, even though at reporting date the going concern assumption had been met).
Whether or not the specific facts and circumstances of this particular lockdown will impact the going concern assumption, will differ from entity-to-entity based on factors such as the industry it operates in (and how that is impacted), and the specific financial health of the entity pre-lockdown.
An entity’s assessment of the go-forward economic environment, and how this will impact the entity, is obviously an area of significant management judgement and estimation. This assessment must be made on a continuous basis, based on the most recent information available, up until the point at which the financial statements are signed.
Also, in making this assessment, entities should make use of hindsight with respect to past events that may give reliable insights into the approach(es) that the Government (and others) may take in response, and factor these into their projections and models, including (but not limited to):
- The timing of step-downs and step-ups in lockdown levels, and the nature of economic activity that can occur at each level.
- The difference in lockdown levels geographically.
- The length of the lockdowns.
- That status of New Zealand's vaccine roll out, and the impact of this on the above.
- The nature, timing, and extent of financial support (i.e. Wage subsidies, Small Business Cashflow Scheme loan etc.).
- Rent relief provided by landlords and other lessors.
(iii) Non-current asset impairment (discounted cash flow modelling) (NZ IAS 36)
For entities that have determined the recoverable amount of non-current assets and/or cash-generating-units (CGUs) by way of discounted cashflow modelling, the temptation may be to update those models of reflect the current lockdown-impacted conditions, including (but not limited to):
- The change in timing and/or amount of cash inflows (i.e. revenues) and outflows (i.e. expenses and capital expenditure).
- Debt and equity structure.
- The discount rate to be used (i.e. weighted average cost of capital).
- The number and nature of different discounted cash flow model scenarios to be probability weighted.
- The probability weightings of multiple discounted cash flows model scenarios.
However, this use of hindsight is expressly prohibited (that is, the assumptions, judgements, and estimates used in an entity’s discounted cashflow model(s) can only be based on facts and information that existed at, and only at, reporting date.
To the extent that the lockdown has brought to light that an entity’s discounted cashflow model(s) did not include aspects that it reasonably should have (i.e. a multiple scenario approach that considered, at a minimum, future cash flows assuming: (a) no further lockdowns; and, (b) a lock down at some future point) then an entity should go back and ensure that this modelling is as accurate and complete as necessary to comply with NZ IAS 36.
However, entities will need to be conscious to ensure that hindsight does not creep into any remodelling of their discounted cashflow model(s), such that the resulting discounted cash flows model(s) reflect only those assumptions, judgements, and estimates that could reasonably have been able to be expected to be made based on only the information available to an entity at reporting date.
In addition to the bullet points in (ii) above, an entity’s discounted cashflow model(s) should also consider assumptions, judgements, and estimates to items which may have been required to be factored into expected cash flows. These might include items such as (but not limited to):
- The timing, status, and operation of the Trans-Tasman travel bubble.
- The reported extent of the delta-variant in New Zealand’s MIQ facilities, and in Australia etc.
- The report impacts and transmission of the delta-variant in other countries.
Potential financial reporting impact areas and checklist
1. The going concern assumption
This is by far the most important area that ALL entities (and their auditors) will need to consider at the outset.
| Item [NZ IFRS] | Comments | Relevant to my entity? |
|
Going concern [NZ IAS 1] [NZ IAS 10] [FRS 44] |
At a minimum, going concern is assessed looking out 12 months from reporting date (or, if the entity is subject to audit in New Zealand, 12 months from the date the audit report is signed). The assessment is not just made at reporting date, but must also be (re)considered at all points in time during the period between reporting date and when the financial statements are ultimately signed (i.e. if the management determine that the entity is not a going concern during this period, the financial statements for the reporting period just ended are not prepared on a going concern basis). When an entity is not a going concern, the financial statements are essentially presented on a “liquidation basis”, with:
Accordingly, the look, feel, and measurement of assets and liabilities in the financial statements is significantly different to that when financial statements are presented on business-as-usual, going concern basis. These areas (particularly the remeasurement of assets and recognition of provisions) may take time for an entity to address, and are not normally something that can be resolved on short notice if the going concern assumption changes just before the accounts are due to be signed. For certain entities, determination of the going concern assumption is almost certainly going to be an area of significant management judgement. Accordingly, these entities will need to provide full, transparent, and entity-specific disclosures regarding the entities ability to continue as a going concern, and any judgements and assumptions that management have used in coming to this decision (i.e. being able to service debt facilities, shareholder support, government assistance, on-going trading etc.). Where there are material uncertainties related to events or conditions that may cast doubt on the ability of an entity to continue as a going concern, but where the financial statements are prepared on a going concern basis, additional disclosures are required, including:
|
YES (no choice, relevant to ALL entities) |
2. Asset impairment, fair values, and recognition
COVID-19 will potentially: (i) diminish an entity’s ability to generate cash; and, (ii) exacerbate an entity’s obligations to pay out cash.
In such situations, the recoverability of an entity’s assets (and cash generating units (CGUs)) is jeopardised.
| Item [NZ IFRS] | Comments | Relevant to my entity? |
|
Trade and other debtors Contract assets Lessor receivables Related party receivables Loans advanced [NZ IFRS 9] |
The ability of an entity’s counterparty to repay their outstanding balances owed to the entity is directly related to the counterparty’s own ability to generate cash – i.e. from their own future sales and settlement of their own receivable balances. The COVID-19 environment has put in significant economic barriers with respect to this, so it should be expected that almost ALL entities (not just banks and financial institutions) will need to revise (and downgrade) their expected future recovery of these receivables, even if counterparties (a) have a good credit history with the entity, and/or (b) have no overdue balances at year end. For most entities, it is highly unlikely that the assumption that provisions for bad debts will remain stable for the upcoming reporting dates will remain appropriate. |
YES / NO / ? |
|
Inventory [NZ IAS 2] |
Inventory must be measured at the lower of cost or net-realisable value. The COVID-19 environment may push the prices of certain inventory items below their cost, and/or certain inventory product markets may dry up completely. Entities will need to monitor the sales price values and inventory turnover in the months subsequent to reporting date, and make adjustments to the carrying amount of inventory at reporting date if necessary. |
YES / NO / ? |
|
Non-current assets Property, plant & equipment Intangibles Goodwill Lease right-of-use asset Cash-generating-units [NZ IAS 36] |
These assets are either tested for impairment annually, or are required to be tested when indicators of impairment exist. In the COVID-19 environment, indicators of impairment will almost certainly be present most entities. Impairment exists when an asset’s recoverable amount is lower than its carrying amount, with the recoverable amount is the higher of either the assets:
The COVID-19 environment will likely have various detrimental impacts to the parameters that underpin both of the above measures of recoverable value. For lease right-of-use assets, this is a similar assessment to the onerous lease assessments that have historically been undertaken for operating leases (prior to the adoption of NZ IFRS 16). Refer to BDO’s comprehensive IFRS in Practice: Impairment of Assets publication for more details (click here). |
YES / NO / ? |
|
Equity accounted investees (EAIs) Associates, Joint Ventures [NZ IAS 28] |
There are a number of areas to consider with respect to the equity accounted carrying amount of an entity’s EAIs:
|
YES / NO / ? |
|
Exploration and evaluation assets (extractive industry) [NZ IFRS 6] |
NZ IFRS 6 allows entities the option of either capitalising or expensing costs related to exploration and evaluation activities. The measurement and impairment requirements are similar to those for non-current assets subject to NZ IAS 36 (above). The COVID-19 environment, and its impact to global commodity process, will likely have various detrimental impacts to the recoverable amounts of previously capitalised costs from exploration and evaluation activities. |
YES / NO / ? |
|
Deferred tax assets [NZ IAS 12] |
NZ IAS 12 has strict recoverability criteria that must be met before an entity is permitted to recognise deferred tax assets (for both carried forward tax losses, and deductible temporary differences). The considerations are similar to those looked at when assessing the going concern assumption. However even if an entity is a going concern, this is not in and of itself determinative that it is probable future taxable profits will be generated to which the deferred tax assets can be utilised. |
YES / NO / ? |
|
Fair value assets Investment property Share holdings (both “passive”, and investment portfolios) Defined benefit plan assets [NZ IFRS 13] |
The fair value of assets represents the price that would be received to sell an asset in an orderly transaction between market participants, at a specific point in time (i.e. reporting date). The COVID-19 environment:
|
YES / NO / ? |
|
Insurance receivables [NZ IAS 37] |
Entities may have business interruption, or bad debtor insurance policies in place. The mere existence of an insurance policy against these losses is not in and of itself determinative that a receivable (and corresponding credit to profit or loss) can be recognised at reporting date. For such a receivable to be recognised it must be “virtually certain”, which in practice has come to mean that the insurance company underwriting the policy has formally (i) accepted the claim, and (ii) confirmed the amount and timing of the claim settlement. |
YES / NO / ? |
3. Provisions and liability recognition
In situations like COVID-19, NZ IFRS may require certain liability balances to be recognised, as well as providing specific criteria that must be met before these liabilities can be recognised.
| Item [NZ IFRS] | Comments | Relevant to my entity? |
|
Onerous revenue and supplier contracts [NZ IAS 37] |
Where the unavoidable costs of a contract exceed the economic benefits to be derived from the contract, the contract is deemed “onerous”. In these situations, from the point the contract becomes “onerous”, entities must recognise the full value of the expected deficit (as a provision, and corresponding expense). The COVID-19 environment may see entities:
|
YES / NO / ? |
|
Restructuring costs Employee termination costs [NZ IAS 37] [NZ IAS 19] |
The COVID-19 environment may see entities having to restructure their organisations, and in doing so, incurring restructuring costs and/or paying out termination benefits to employees. A provision for these costs is recognised when, and only when, there is a firm legal or constructive obligation from a past obligating event. Accordingly, a provision for these items is recognised when, and only when, the decision to restructure the entity that has been (i) approved by the board, and (ii) communicated to affected parties (i.e. employees, customers etc.). |
YES / NO / ? |
|
Financial guarantee contracts [NZ IFRS 9] |
The COVID-19 environment may see entities who have provided guarantees to other third parties or related parties (i.e. loans and leases), now expecting to ultimately have to make-good on these guarantees. Where this is the case, liabilities for the financial guarantee contracts will need to be remeasured. |
YES / NO / ? |
4. Other areas of recognition and measurement
The wider facts and circumstances surrounding COVID-19 may highlight additional recognition and measurement areas to be navigated through with respect to other NZ IFRS’.
| Item [NZ IFRS] | Comments | Relevant to my entity? |
|
Variable consideration [NZ IFRS 15] |
The COVID-19 environment may result in variable consideration in contracts with customers needing to be revisited, including refunds, concessions, success based fees, bonus payments etc. This may introduce additional scenarios into an entity’s expected value measurement determinations, and/or more aggressive negative side weightings. At all times, NZ IFRS 15’s constraint conditions for recognising variable revenue need to be adhered to. |
YES / NO / ? |
|
Lease renewal and termination options Rent relief provided by lessors [NZ IFRS 16] |
The COVID-19 environment may see entities having to reassess and change their decisions regarding the use (or non-use) of renewal and termination options. Such updates represent “lease modifications”, and will require remeasurement of the lease liability and right-of-use assets (using updated, current discount rates).
Where rent-relief is provided in accordance with contractual clauses in the lease agreement (such as “No access in emergency” clauses, and the like) the rent relief is accounted for as a variable lease payment, with any reduction in the lease liability recognised in profit or loss. For lessees, where rent-relief is not provided in accordance with contractual clauses in the lease agreement (i.e.: as a gesture of “goodwill” from lessors) there are criteria within NZ IFRS 16 that, if met, permit the rent relief to be accounted for as a variable lease payment (as described above). If the criteria are not met, then the impact of the rent relief is accounted for as a “lease modifications”, and will require remeasurement of the lease liability and right-of-use assets (using updated, current discount rates). Further details and worked examples of different types of COVID rent relief for lessees can be found in BDO’s IFR Bulletin (click here).
Further details and worked examples of different types of COVID rent relief for lessors can be found in BDO’s IFR Bulletin (click here). |
YES / NO / ?
YES / NO / ?
|
|
Share-based payment vesting [NZ IFRS 2] |
The COVID-19 environment will likely impact a broad range of vesting conditions associated with share-based payments (commonly those with employees). Where the outlook of satisfying these conditions has diminished, this may result in “forfeiture accounting” being required for changes in the assessments of service conditions and other (non-market) performance conditions (i.e. reversing previous period’s expense back through profit and loss as gains in the current year). |
YES / NO / ? |
|
Modified loan agreements [NZ IFRS 9] |
As with lease contracts, the COVID-19 environment may see entities modifying the terms and conditions of loans they have received (liabilities), as well as loans they have advanced (assets) For loan liabilities, modifications that result in a 10% greater change in the present value of payments are treated as de-recognition and immediate re-recognition event (with any difference recognised in profit or loss). For loan assets, NZ IFRS does not provide a “fixed” % change threshold and entities must also consider the qualitative nature of the modification (i.e. does the modification provide temporary (long-term) relief such that the net economic value of the loan is not (is) significantly affected). As such entities (and their auditors) will need to consider the appropriate thresholds and/or relevant qualitative factors present, and apply the same de-recognition and immediate re-recognition treatment when the threshold is crossed. Refer to BDO’s June 2021 Accounting Alert article for more details (click here). |
YES / NO / ? |
|
Hedge ineffectiveness Hedge disqualification [NZ IFRS 9] |
The COVID-19 environment may result in decrease in hedge effectiveness, or even full disqualification from continuance of hedge accounting (i.e. if the hedged item e.g. (forecasted transactions) is no longer highly probable). | YES / NO / ? |
|
Government support measures [NZ IAS 12] [NZ IAS 20] |
In response to the COVID-19 environment, many governments (including New Zealand’s) may extend various support measures to business, and individuals through businesses (i.e. wage subsidies). Entities will need to consider the specific nature and features of these support measures, to determine their appropriate accounting treatment (i.e. as income tax reductions, as government grants received, or as other mechanisms (leases, financial instruments etc.). Where support measures come in the form of income tax rate reductions, entities will need to consider whether the relevant law has been substantively enacted as at reporting date. |
YES / NO / ? |
5. Presentation areas
The wider facts and circumstances surrounding COVID-19 may require entities to (re)consider how their financial statements may need to be presented in order to comply with various aspects of NZ IFRS.
| Item [NZ IFRS] | Comments | Relevant to my entity? |
|
Current versus |
The COVID-19 environment may see:
|
YES / NO / ? |
|
Non-current assets held for sale [NZ IFRS 5] |
As above, the COVID-19 environment may see entities expecting to realise certain non-current assets in the 12 months following reporting date. However, this fact in and of itself is not determinative to present and classify a non-current asset as “Held for sale” in the financial statements. NZ IFRS 5 has a number of other, strict criteria that must be met before this treatment is applied, including (but not limited to) that as at reporting date:
|
YES / NO / ? |
|
Discontinued operations [NZ IFRS 5] |
The COVID-19 environment may see entities reduce operations, components that are disposed of or cease operations. Where these meet the definition of a discontinued operation, they will require separate, and specific presentation and disclosure in an entity’s balance sheet and profit or loss statement. |
YES / NO / ? |
6. Disclosure areas
The wider facts and circumstances surrounding COVID-19 may require entities to provide updated, specific disclosures with respect to those areas that are consequentially impacted.
| Item [NZ IFRS] | Comments | Relevant to my entity? |
|
Financial risk management [NZ IFRS 7] |
NZ IFRS 7 requires entities to may full, transparent, and entity-specific quantitative and qualitative disclosures regarding the nature and extent of risks arising from financial instruments The COVID-19 environment with have wide ranging, but entity-specific impacts to an entities credit risk, liquidity risks, and market risk exposures. Accordingly, it is highly likely that many entities will need to revisit their financial risk management notes and update these so as to include consequential impacts from COVID-19. |
YES / NO / ? |
|
Fair value [NZ IFRS 7] |
Fair value hierarchy disclosures may “shift down” into lower tiers as more fair values may need to be determined using a greater amount of unobservable inputs. | YES / NO / ? |
|
Events after reporting period [NZ IAS 10] |
NZ IAS 10 requires entities to disclosure information about significant non-adjusting events (refer A(i) above) that have occurred after reporting date, and before the financial statements are signed (i.e. (i) the nature of the event; and, (ii) an estimate of the financial effect, or that no such estimate can be made). In some cases, entities may have included these disclosures within other notes to the financial statements (i.e.: Going concern note, or a specific COVID-19 Impact note). |
YES / NO / ? |
|
Going concern [NZ IAS 1] [FRS 44] |
Refer to section 1. The going concern assumption (above). | YES / NO / ? |
Need assistance with navigating the consequential financial reporting requirements of COVID-19?
BDO IFRS Advisory is a dedicated service line available to assist entities in navigating all things (NZ) IFRS related.
Members of BDO’s IFRS Advisory department come ready with real life experience in applying IFRS and are therefore well placed to provide entities with the expertise and assistance they require.
For more information as to how BDO Accounting Advisory Services might assist with your entity in navigating this and other areas of IFRS application, please contact James Lindsay at BDO Accounting Advisory Services (james.lindsay@bdo.co.nz, ph +64 9 366 8041), and visit our webpage.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact your respective BDO member firm to discuss these matters in the context of your particular circumstances.