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Core tip: This article aims to remind companies to adopt existing accounting requirements that should be considered when dealing with the financial impact of the epidemic when adopting corporate accounting standards to prepare financial statements as of December 31, 2019 (balance sheet date).
Affected by the recent outbreak of the new coronavirus ("outbreak") and its rapid spread, many countries or regions require local companies to restrict or suspend business activities, and implement travel restrictions and self-isolation measures. These measures and policies have adversely affected (or expected to cause) the business activities of many enterprises. As the epidemic continues, it is difficult to predict the extent and duration of the commercial and economic impact of the epidemic. Therefore, enterprises may encounter challenges when preparing financial statements in accordance with corporate accounting standards. The purpose of this article is to remind companies to adopt existing accounting requirements that should be considered when dealing with the financial impact of the epidemic when preparing financial statements for the year ended December 31, 2019 (balance sheet date) using corporate accounting standards. The issues discussed in this article cannot cover all situations, and their applicability depends on the specific facts and circumstances of each enterprise.
Events after the balance sheet date
According to the "Accounting Standards for Business Enterprises No. 29-Events after the Balance Sheet Date", the distinction between adjusted and non-adjusted events after the balance sheet date should be based on whether the event provides evidence for the existence of the enterprise on the balance sheet date .
The outbreak was approaching the balance sheet date and continued until then. For companies that have been or are expected to be affected by the epidemic or the measures taken, management needs to provide evidence on whether there are any matters in this series of issues and what matters to the activities existing on the company's balance sheet date or the status of its assets and liabilities Judge and evaluate. Even if management concludes that these matters are not adjustments, but because their impact is significant, the company still needs to disclose the nature of the event and its estimate of its financial impact.
Our view
Most of the impacts on the business operations and balance sheets of enterprises are not directly caused by the epidemic, but may be caused by relevant measures taken by the government to curb the epidemic after the balance sheet date. These companies can conclude that the matter did not provide evidence for the company's existence on the balance sheet date, so it was taken as a non-adjusting matter. However, if the impact of the epidemic and subsequent control measures is significant, the company should disclose these matters and their estimates of financial impact (if practicable), or make a qualitative description of their subsequent operating conditions in order to provide users of financial statements Useful financial information.
Continue to operate
Accounting Standards for Business Enterprises No. 30-Presentation of Financial Statements requires management to evaluate the company's ability to continue as it operates when preparing its financial statements. If the evaluation results show that there is significant doubt on the going concern, the enterprise should make relevant disclosures. When assessing whether the going concern assumption is appropriate, the company should consider all available information about the future, and the period covered by the assessment should include at least 12 months from the balance sheet date. The evaluation shall be performed before the date of approval of the financial statements.
For the 2019 financial statements prepared on the basis of going concern, management should consider the current and expected impact of the epidemic on corporate activities in its assessment of the going concern capability. The unpredictability of the potential impact of the epidemic may lead to significant uncertainty that raises significant doubts about the company's ability to continue operating. In this case, if the company still prepares financial statements on the basis of going concern, it is necessary to disclose in its financial statements the influencing factors that cause major doubts about the ability to continue operating and the improvement measures the company intends to take.
Our view
For continuing operations assessment, the extent to be considered, the conclusions reached, and the extent to which disclosure is required will depend on the specific facts and circumstances, as not all companies are affected or affected to the same extent in the same way. Given that the epidemic is still ongoing and uncertain, companies may need to make significant judgments and continuous updates on the assessments up to the date of approval of the financial statements.
Fair value measurement
"Accounting Standards for Business Enterprises No. 39-Fair Value Measurement" provides that fair value measurement is an estimate of the exit price based on assumptions (including assumptions about risk) that market participants may make under the current market conditions on the measurement date.
The purpose of fair value measurement is to reflect the fair value of the assets or liabilities based on the measurement date and not the situation at a future date. Although events and / or transactions that occur after the measurement date may provide insights into assumptions (especially unobservable assumptions) when estimating the fair value at the measurement date, only if there is an existing at the measurement date and market participants know or know Adjustments to assumptions will only be made in fair value measurements when circumstances provide additional evidence.
When making important assessments and judgments on fair value measurements, companies should consider what conditions and corresponding assumptions are known or known to market participants. The impact on fair value measurement will depend on whether the severity of the epidemic will affect market participants' valuation assumptions at the balance sheet date.
Our view
The goal of fair value measurement is to reflect the current value of the asset or liability based on the measurement date and not the condition at a future date. Therefore, enterprises should consider the market participants' information on the epidemic situation at the balance sheet date in order to determine the fair value at that date.
Expected credit loss assessment
The Accounting Standards for Business Enterprises No. 22-Recognition and Measurement of Financial Instruments requires companies to conduct expected credit loss assessments of financial assets that are not measured at fair value and whose changes are included in current profit or loss. Reasonable and evidence-based information such as forecasts of future economic conditions are also included. The above assessments should be based on information at the balance sheet date and, where applicable, adjusted for subsequent available information. Expected credit loss is a probability-weighted amount determined by evaluating a series of possible outcomes.
Given that preliminary cases of unexplained pneumonia have been reported before December 31, 2019, when considering criteria that require the inclusion of forecasts of future economic conditions in a probabilistic weighted manner, from a technical perspective, companies should assess the likelihood of events Provided that the event would seriously affect the estimation of the expected loss of financial assets. When assessing expected credit losses, management should consider reasonable and evidence-based information on the balance sheet date.
Enterprises should provide qualitative and quantitative disclosures so that users of financial statements can understand the impact of credit risk on the amount, timing and uncertainty of future cash flows.
Our view
Expected credit loss is a probability-weighted amount determined by evaluating a series of possible outcomes. The impact of the epidemic may vary depending on the specific circumstances of the business and its method of assessing expected credit losses. Therefore, in conducting the assessment, management should make reasonable and evidence-based considerations of past events, current conditions and forecasts of future economic conditions.
Impairment assessment
"Enterprise Accounting Standards No. 8-Asset Impairment" requires enterprises to assess whether non-financial assets are impaired at the balance sheet date. Only when the events after the balance sheet date and the information received after the balance sheet date provide additional evidence for the conditions already existing at the balance sheet date, the enterprise should consider the above matters and information when judging the signs of impairment. Similarly, when determining the recoverable amount of an asset, information obtained after the balance sheet date should be considered only if such a situation exists at the balance sheet date. The above assessment should be based on judgement of all facts and circumstances.
When the recoverable amount is determined based on the present value of the estimated future cash flow of the asset, the estimated cash flow should reflect management's best estimate of the entire economic situation over the remaining useful life of the asset. Whether management's forecast or budget for future cash flows will be realized in the future will present major challenges. Because the remaining useful life of many assets (such as goodwill) is long-term, companies should consider not only short-term impacts, but also long-term impacts.
The greater the uncertainty in the current environment, the greater the importance for companies to make detailed disclosures of the assumptions used, the sources of information on which they are based, and the impact of changes in key assumptions (sensitivity analysis).
Our view
The enterprise needs to determine whether the epidemic situation is considered as an indication of impairment on the balance sheet date, and if so, it needs to perform an impairment test. Regarding the impairment test conducted on December 31, 2019, management needs to pay attention to the assumptions used to determine the recoverable amount should reflect the conditions existing on that date. Companies need to consider providing detailed disclosure of assumptions.
Other financial statement disclosure requirements
The Accounting Standards for Business Enterprises No. 30-Presentation of Financial Statements also requires disclosure of key assumptions and uncertainties used in important accounting estimates, including accounting that may cause significant adjustments to the carrying amounts of assets and liabilities in the next accounting period Basis of estimation.
The financial statement disclosure requirements for companies directly and / or indirectly affected by the epidemic will vary based on the degree of financial impact and the availability of information. For example, the value or recoverable amount of certain assets after the balance sheet date may have been lower than their carrying amounts as of December 31, 2019. If the decline in value is determined as a non-adjusting matter in accordance with the guidelines described earlier, the company does not adjust the book value, but instead discloses the fact and its financial impact if it can be reasonably estimated. For another example, because the epidemic situation may also generate obligations or uncertainties that the company has not previously confirmed or disclosed, you need to consider whether to disclose additional information in the financial statements to explain the impact of the epidemic situation on estimated liabilities and contingent assets / liabilities.
For an enterprise whose report schedule for the next quarter is close to the date of approval of the annual financial statements, it may be possible to obtain quantitative financial information on the impact of the epidemic when the annual financial statements are submitted. In this case, if the impact is significant, companies should consider providing such quantitative information disclosure in their annual financial statements.
Our view
Enterprises need to consider the extent to which the epidemic has adversely affected their business and fully disclose information about assets and liabilities with significant estimation uncertainty so that users can better understand the financial impact.
Other accounting estimates
In addition to the items listed above, according to the requirements of accounting standards, management also needs to make the following important accounting estimates. Such estimates usually include management's assumptions about whether assets can be recovered in the future and liabilities are settled.
• Sales discounts and sales returns specified in Accounting Standards for Business Enterprises No. 14-Revenue (2006); or variable consideration of contract revenues with customers under Accounting Standards for Business Accounting No. 14-Revenue (2017) And related restrictions
• Net realizable value of inventories required by Accounting Standards for Business Enterprises No. 1-Inventories
• Recoverability of deferred income tax assets under Enterprise Accounting Standards No. 18-Income Tax
• Fixed assets, intangible assets and fixed assets determined in accordance with Accounting Standards for Business Enterprises No. 4-Fixed Assets, Accounting Standards for Business No. 6-Intangible Assets and Accounting Standards for Business No. 21-Leasing (2018) Depreciation / amortization period of the right-of-use asset and estimated net residual value
• Estimated liabilities recognized in accordance with Accounting Standards for Business Enterprises No. 13-Contingencies, such as loss contracts, etc.
This material has been prepared for general information purposes and is not intended to be relied on for accounting, tax, or other professional advice.