Insight 8 April 2020

Accounting and financial reporting implications around COVID-19

Governmental authorities and regulators have been responding in different ways and timeframes, adapting their responses according to their particular circumstances.

The COVID-19 pandemic has rapidly evolved globally and may evolve further, adversely affecting both businesses and households. Governmental authorities and regulators have been responding in different ways and timeframes, adapting their responses according to their particular circumstances.

Consequently, it is likely to be necessary to check for up-to-date information and developments in the relevant jurisdiction(s) when considering the implications arising from the COVID-19 pandemic.

Many tax authorities have announced changes to tax reporting and payment deadlines and other Governmental authorities have announced changes to regulatory reporting deadlines and payment deadlines.”

In Luxembourg, a Grand Ducal regulation was published on Friday, 20 March 2020 introducing a number of measures facilitating board and shareholders meetings to be validly held by various means without a physical meeting even if the articles state otherwise. In other jurisdictions, the requirements around physical board and shareholders meetings and/or the location of such meetings may need to be checked in the relevant jurisdiction(s), where it may be necessary to ensure that any such meetings continue to adhere to the relevant entity’s constitutional documents. In particular, the use of electronic signatures is an issue where practice is rapidly evolving. Should you have any concerns regarding any of these issues, please do not hesitate to contact Sanne in the first instance to check the position.

In this briefing note, we outline the current position with respect to the likely accounting implications arising from the COVID-19 pandemic and the impact on financial reporting deadlines in certain jurisdictions.

Financial reporting deadlines

Certain jurisdictions (e.g. Luxembourg) have enacted legislation amending statutory deadlines, while in the majority of other jurisdictions the applicable regulators have announced that they will exercise forbearance when exercising their regulatory duties (i.e. will not enforce the statutory deadlines and therefore will not apply penalties for breaches of such statutory deadlines) provided both investors and the regulators are kept fully informed prior to the statutory publication and filing deadlines.

Certain regulators (e.g. Jersey’s regulator, the JFSC) may even permit notification to the regulator shortly after the relevant statutory deadline has passed in respect of certain filings. The JFSC has announced a three-month extension to the deadline for filing audited financial statements provided notice is given within ten working days of the original deadline.

This extension applies to all relevant Jersey entities other than public companies as Jersey company law already provides for a similar extension for public companies in certain circumstances.

Where an entity is aware that it will be unable to meet a statutory deadline, it is highly recommended that the entity should engage in early and open discussions with the relevant authority, which is very likely to be understanding and exercise forbearance. It should be noted that regulators will be likely to exercise forbearance only if a deadline is missed due to the impact of the COVID-19 pandemic rather than due to other reasons.

On Thursday, 26 March 2020, the UK’s Financial Conduct Authority (FCA), Financial Reporting Council (FRC) and Prudential Regulation Authority (PRA) jointly announced a series of actions to ensure that information continues to flow to investors and to support the continued functioning of the UK’s capital markets.

These temporary measures include the following:

An extra two months will be permitted for publication of audited annual financial reports, amending the existing four-month publication deadline to six months (indeed, the FCA urges all companies that feel it appropriate to utilise the additional two months to do so).

Companies will be permitted to delay the filing of accounts at Companies House. While companies will still have to apply for the three-month extension to be granted, those citing issues around COVID-19 will be automatically and immediately granted an extension via a fast-tracked process.

Companies are encouraged to consider delaying planned tenders for new auditors, even when mandatory rotation is due.

On Friday, 27 March 2020, the European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, issued a Public Statement on the implications of the COVID-19 pandemic on the deadlines for publishing financial reports which apply to listed issuers under the EU Transparency Directive (EUTD).

The statement acknowledges the difficulties encountered by issuers in preparing financial reports and the challenges faced by auditors in carrying out timely audits of accounts due to the COVID-19 pandemic, which may impair the ability of issuers to publish within the legislative deadlines. The statement announced that ESMA is coordinating with EU National Competent Authorities (NCAs) and recommends that such NCAs should apply forbearance powers towards issuers who need to delay publication of financial reports beyond the statutory deadline due to the impact of the COVID-19 pandemic. At the same time, the statement underlines that issuers should keep their investors informed of any expected publication delay, if applicable, and that requirements under the Market Abuse Regulation still apply.

The EUTD deadlines applicable to entities with securities listed on EU regulated stock exchanges are four months for annual reports and three months for interim reports. ESMA notes that certain EU Member States may have already made legislative changes to extend these deadlines, however, where such legislative changes have not been made, ESMA is recommending that all NCAs should exercise forbearance when applying these deadlines for a period of up to two months for annual reporting and up to one month for interim reporting.

While ESMA’s announcement is not binding on individual NCAs, and we should check announcements by each relevant NCA, it is reasonable to expect that all EU NCAs will comply with ESMA’s recommendation to the fullest extent that they are permitted in law to do so.

Technically, the applicable deadlines will remain in place (unless changed by law in the relevant jurisdiction), but the relevant NCA will not take any action to enforce EUTD deadlines if the accounts are published and filed within six months for annual accounts and within four months for interim accounts. Nevertheless, where issuers reasonably anticipate that publication of their financial reports will be delayed beyond the statutory deadline, such issuers are expected to inform their NCA of this and inform the market of the delay, the reasons for such delay and, if possible, the estimated publication date.

Accounting implications required to be considered by boards - key issues to be considered are:

To be assessed on a base-by-case basis as to whether or not the COVID-19 pandemic has adversely affected the entity’s ability to continue as a going concern; additional assessment and disclosure are required.

to be assessed on a base-by-case basis as to whether or not the COVID-19 pandemic should be disclosed as a subsequent event, whether or not the impact is considered as material and, if so, whether or not adjustments should be made in the financial statements.

  1. It is generally expected that all entities will conclude that the COVID-19 pandemic should be disclosed as a subsequent event, even where the impact on the entity is not considered to be material.
  2. For 31 December 2019 year-end, we anticipate that the majority of boards may conclude that no adjustment for the effects of the COVID-19 pandemic should be made in the financial statements on the following basis:

The COVID-19 pandemic commenced in China shortly prior to the reporting date, being notified to the World Health Organisation (“WHO”) by China on 31 December 2019, and the situation has continued to evolve throughout the period since the financial reporting date, being declared by the WHO as a Public Health Emergency of International Concern on 30 January 2020 and as a worldwide pandemic on 11 March 2020. Although the COVID-19 pandemic may have a material adverse impact on the assets held by an entity, the overall financial position and/or net results of the entity, no adjustment should be made in the financial statements for the impact of the COVID-19 pandemic on the entity as the conditions (i.e. worldwide pandemic) that may have a material impact thereon did not exist as at 31 December 2019. N.B. Although this is our expectation, it is important to note that it is each board’s responsibility to form its own opinion as to whether or not the relevant conditions already existed as at the relevant financial reporting date.

If the COVID-19 pandemic has given rise to a significant increase in credit risk (SICR) on financial assets held, this may lead to re-classification from one “bucket” to another.

  • ESMA notes that the measures taken in the context of the COVID-19 pandemic which permit, require or encourage suspension or delays in payments, should not be regarded as automatically having a one-to-one impact on the assessment of whether loans have suffered a SICR. Therefore, a moratorium under these circumstances should not in itself be considered as an automatic trigger of SICR.
  • The European Banking Authority (EBA) has expressed the view that the public and private moratoria, as a response to the COVID-19 pandemic, to the extent they are not borrower specific but rather addressed to broad ranges of product classes or clients, do not have to be automatically classified as forbearance measures in respect of IFRS 9 and the definition of default.

If a loan/debt is subject to temporary relief measures such as deferral of payments of principal and/or interest, do such measures constitute a substantial modification of the terms of the loan/debt? If yes, then the original loan/debt would need to be derecognised and the revised loan/debt would need to be recognised as a new asset.

ESMA considers that issuers should carefully assess the impact of the economic support and relief measures on recognised financial instruments and their conditions. This includes the assessment of whether such measures result in modification of the financial assets and whether modifications lead to their derecognition. In the absence of specific guidance in IFRS 9, issuers develop their accounting policies in accordance with IAS 8 and IFRS 9 principles. Determining whether derecognition occurs depends on whether the modification of the terms of the instrument is considered substantial or not. ESMA notes that such assessment should include both qualitative and quantitative criteria and, especially given the situation, might be subject to significant judgement. In light of current circumstances, ESMA considers that if the support measures provide temporary relief to debtors affected by the COVID-19 pandemic and the net economic value of the loan is not significantly affected the modification would be unlikely to be considered as substantial.

This must be assessed on a case-by-case basis taking into account all relevant factors. IFRS 9 requires issuers to measure expected losses and consider forward-looking information, by reflecting “an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes” and taking into account “reasonable and supportable information that is available without undue cost or effort at that date about past events, current conditions and forecasts of future economic conditions”. Issuers should assess the extent to which, amongst other facts, the high degree of uncertainty and any sudden changes in the short-term economic outlook are expected to result in impacts over the entire expected life of the financial instrument. Such considerations are integral to the functioning of the ECL model under IFRS 9 and ESMA highlights that the standard does not envisage any automatism as to how such contextual factors should impact on the loan loss provisioning. In particular, given the scarcity of available and reliable information in the current context, issuers will face problems in generating reasonable and supportable short-term economic forecasts.

In this context, ESMA highlights the recent European Central Bank (ECB) supervisory measures taken in reaction to the Coronavirus in this area (i.e. the recommendation that, given the current state of uncertainty linked to the COVID-19 outbreak, within the framework provided by IFRS, issuers give a greater weight to a long-term stable outlook as evidenced by past experience and take into account the relief measures granted by public authorities such as payment moratoria).

Finally, in ESMA’s view, when making forecasts, issuers should consider the nature of this economic shock (i.e. whether the COVID-19 effect is expected to be temporary) and the impact that the economic support and relief measures (including debt moratoria) will have on the credit risk over the expected life of the instruments, which include, depending on the instruments’ maturities, longer-term estimates.

The links below provide further guidance on the accounting implications of the COVID-19 pandemic from ESMA, the EBA and the Committee of European Auditing Oversight Bodies (CEAOB).

Calculation of expected credit losses in accordance with IFRS 9: https://www.esma.europa.eu/document/accounting-implications-covid-19-outbreak-calculation-expected-credit-losses-in-accordance

Guidance on accounting implications of COVID-19: https://www.esma.europa.eu/press-news/esma-news/esma-issues-guidance-accounting-implications-covid-19

If you should have any queries regarding any of the above or if you require any further information, please do not hesitate to contact your regular contact at Sanne.

For more information, please get in touch with our people. We'd be delighted to speak with you to discuss our services. 

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Stephanie Hopkins Country Head, Jersey - Jersey
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