In the light of the current COVID-19 virus pandemic related events and circumstances in the world and with us, we all have to adapt to the situation, both the economic entities and audit profession.
Companies would need to make it possible to the users of financial reports a transparent insight in the real and a potential impact of the current situation on their further doing business.
In this regard, we wish to draw attention to the disclosures in the financial reports for all companies and particularly for the companies of public interest.
The areas that require a good quality and additional volume of disclosures relate to:
- events after the reporting period, and
- ability of a company to operate in accordance with the going concern principle.
Events after the reporting period are convenient or inconvenient events that occur between the end of the reporting period and the date when the financial reports are approved for publication.
The Accounting Law sets forth that legal entities, and/or entrepreneurs, have a duty to submit to the Business Registers Agency (APR) regular financial reports for the reporting year for the needs of public disclosure, by no later than 30 June of next year.
Two types of these events are recognized:
(a) the events that provide evidence of the conditions existing at the end of the reporting period (corrective events after the balance sheet date), and
(b) the events that highlight the conditions occurring after the reporting period (non-corrective events after the balance sheet date).
The events caused by the existing COVID-19 pandemic represent non-corrective events affecting, beyond any doubt, a significant impact on doing business and require as such their disclosure and their impact on the operation of economic entities.
To the contrary, their non-disclosure could affect the economic decisions made by the users on the grounds of the financial reports.
In the notes, in the segment of Events after the Reporting Period, economic entities would need to disclose in particular:
- that they are ready to apply their plans relating to continuation of their operation and to ensure a minimum level of production and sales volume,
- how the newly created situation will affect their participation in the market, and/or an estimate of the impact which the decreased volumes of production and sales will have on their earnings,
- the management estimate that includes both qualitative and quantitative indicators of the impact exerted by the newly created situation on the business activities and financial position of the company, its liquidity, participation in the market, and other economic aspects of doing business.
Another moment you have to pay attention to when making the disclosure is the going concern principle.
Basic assumption of the draw-up of the financial reports is the going concern of a company, i.e. the assumption that the entity will continue its operation in the foreseeable future. Another assumption is also that the entity neither intends nor needs to liquidate or to reduce the volume of its operation.
An entity does not draw up the financial reports in accordance with the going concern principle if the management, after the balance sheet date, decides to discontinue its operation or believes not to have any other real possibility but liquidation.
Worsening of the business performance and of the financial standing after the balance sheet date as a result of the COVID-19 pandemic, may point to a need of reexamining further sustainability of the assumption that relates to the going concern principle. If the going concern assumption is non-existent, the International Accounting Standard (IAS) 10 – Events after the Reporting Period requires a change of the accounting base, and not the adjustment of the amounts recognized according to the original accounting base. It goes without saying that the above involves an obligatory disclosure thereof in the Notes to the Financial Reports.