Article:

Potential effects of the Coronavirus outbreak on financial reporting

17 July 2020

Implications of COVID-19 for Lessors (IFRS 16 Leases)

BDO has published IFR Bulletin 2020/12 – Implications of COVID for Lessors. The effects of COVID-19 have raised many questions for lessors, including how they should recognise lease income, account for rent concessions, and many other questions. This Bulletin summarises BDO’s most up to date analysis on these issues in FAQ format, with a number of illustrative examples.

Accounting for rent concessions: Lessee FAQs

On 28 May 2020, the IASB issued amendments to IFRS 16, which provide relief and simplify the lessee accounting requirements for lessees in accounting for rent concessions granted as a direct consequence of COVID-19. This publication answers dozens of questions that lessees have been asking with regards to the amendment. The Bulletin answers how to assess whether a lessee may apply the practical expedient, how the underlying calculations should be done, along with numerous illustrative examples of common rent concessions.

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Impairment implications of COVID-19 (IFRS 9 Financial Instruments)

BDO has published an IFR Bulletin discussing the implications of COVID-19 on the expected credit loss (ECL) requirements of IFRS 9, which is particularly important for lending entities. This bulletin highlights a number of important considerations, including how to determine whether post-balance sheet date information should be incorporated into ECL measurement, how COVID-19 affects the staging of financial assets and other effects of the pandemic on ECL measurement.

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Implications for 31 December 2019 Year Ends

A number of businesses have reduced or suspended operations and have instructed employees to stay at home.

This brings potentially significant financial reporting implications, in particular considerations concerning impairment and going concern. This IFRB focusses on implications for periods ended 31 December 2019, but will be relevant for other reporting dates. There will also be implications for interim reports issued in 2020.

Implications for Year Ends beginning on or after 31 January 2020

For reporting periods beginning on or after 31 January 2020, the effects of the coronavirus would need to be incorporated into the preparation of financial statements. The effects of the coronavirus may be very wide spread, and relate to many industries; they are not limited only to entities operating directly in the travel and tourism industry (e.g. airlines, tour operators, etc.). Coronavirus may affect entities in nearly every sector, due to the following impacts:

Reduced consumer demand for goods and services due to lost income and/or restrictions on consumers’ ability to move freely;
Lack of investment in capital improvements and construction reducing demand for many goods and services;
Reduction in market prices for commodities and financial assets, including equity and debt instruments; and
Disruption of global supplies chains due to restrictions placed on the movement of people and goods.

Impairment Implications of Covid-19

IAS 36 Impairment of Assets applies to many of an entity’s non-financial assets, such as goodwill; intangible assets; property, plant and equipment; right-of-use assets; equity accounted investees and investment properties measured on the cost model.

Due to the adverse economic impact of COVID-19, many entities will have impairment indicators present at reporting date and thus will need to perform impairment tests on their assets.

Impairment tests may prove difficult to perform due to the level of uncertainty created by the effects of COVID-19.

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