It’s sure that the health crisis linked to Covid-19 will have a strong impact on the financial statements for the years ending December 31, 2019 and on those ending afterwards. Here are the impact and recommendations of the consequences on the consolidation and reporting of the financial statements.
Consolidation & reporting and Covid-19: What are the applicable texts?
It is from March 11, 2020 and the outbreak of the epidemic by the WHO that the Covid-19 impact of 2019 begins. The accounts closed on 31 March 2020 must therefore apply the specific rules provided for. There are a certain number of regulations applicable to French companies for the preparation of their corporate and consolidated financial statements:
- CNA (Accounting Standards Authority) Recommendation of May 18, 2020
- International Financial Reporting Standard (IFRS) of the IASB (International Accounting Standard Board)
- Commercial Code (Article L123-20): recognition of liabilities arising in the course of the financial year or a previous financial year
- PCG: definition of post-balance sheet events likely to generate expenses.
- Information notes of the national company of auditors (CNCC)
The consequences of Covid-19
What impacts of Covid-19 on the financial statements of 31/12/2019?
For the IFRS referential there is no impact on the accounts of assets and liabilities unless the situation is definitively compromised. According to the PCG, there is no impact because it is an event after the closing of the financial year.
On 31/12/2019, WHO reported only a limited number of people with a virus that was unknown at that time. There was therefore no scientific evidence of human-to-human transmission at that date.
Event is linked to conditions existing at the closing date (art. 513-4): if this is the case, the accounts must be adjusted according to these subsequent events; in fact, they provide information that makes it possible to better calculate the value of the company’s assets or liabilities existing at the closing date of the financial year
Event is not linked to conditions existing at the balance sheet date (art. 833-2): if this is the case, there is no impact on the balance sheet and income statement. The accounts do not need to be modified.
However, with respect to events after the closing of the financial year, it is necessary to provide an appendix on possible consequences related to the Covid-19 epidemic that may be the subject of information.
This appendix must include several items of information. It may concern a decrease in sales, revenues and operating cash flows, or losses or contracts. The activation of specific clauses in contracts that, for example, interrupt them or significantly alter their effects. It may also include information on a decline in the market price of financial assets held, the breach of bank covenants that require repayment of debt or the renegotiation of these covenants.
It may also include information relating to the company’s inability to raise the necessary financing or the impact on payment terms (of the company and its customers) and, more generally, on the liquidity position.
Finally, the company may also provide other information such as production interruptions, disruptions in supply chains, unavailability of personnel, closures of plants, factories, etc., or restructuring and redundancy plans.
Should pro-forma information be published at the level of the financial statements of June 30, 2020?
According to IFRS : In general, salaries paid to employees are by nature expenses that are incurred in the normal course of business (CC 4.43). The same applies to depreciation and amortization of operating, industrial or intangible assets. However, current events, however unusual they may be, should not affect the very nature of the salary or depreciation expenses incurred nor lead to their being considered unusually high.
It is therefore not permitted to reclassify current expenses to non-current expenses. All expenses must be presented in the same manner as normal. If there are additional expenses, these must be left under current expenses.
Consequences of Covid-19 on assets, liabilities, income and expenses
Need to implement impairment tests?
For IFRS, the health crisis alone does not constitute an impairment loss. IAS 36 and the impairment tests must be carried out according to stock market values, the drop in income or budgets, etc. A rapid return scenario or a scenario with macro-economic effects must be considered. Caution: impairment is definitive in intermediate situations.
For the PCG, tests are carried out once a year. An interim depreciation is temporary for the interim situation. Impairment may relate to: goodwill, intangible and tangible assets, rights of use (IFRS16), equity investments (including investments accounted for using the equity method).
Impact of Covid-19 on the valuation of inventories and the depreciation of intangible and tangible assets
According to IFRS and the GAAP, costs related to the under-activity cannot be taken into account in the production cost of inventories.
With regard to fixed assets, IFRS and the GAAP consider that once a fixed asset is in use, it is not possible to stop depreciation during the period when it is not in use unless it is classified as an asset held for sale (IFRS 5) or depreciated on the basis of the units of work produced.
Impact of Covid-19 on debt renegotiations and rent adjustments by the lessee
IFRS and the GAAP consider that when it is concluded that the renegotiation of a financial liability is analysed as an extinguishment, the old liability is derecognised and a new one is recognised in the balance sheet at its fair value. The costs incurred are recognized immediately in the income statement.
There are two cases on IFRS 16. If there is no change in the contract, then a negative rent is posted in the income statement.
Currently, a draft amendment currently being approved would allow the tenant to account for adjustments to rents initially due in 2020 as a result of the health crisis as negative variable rents without having to analyse whether they are made pursuant to the contractual or legal clauses governing the performance of the contract.
Impact of Covid-19 on the closure of a subsidiary or an establishment and on banking agreements
According to IFRS : Discontinued operations are managed by IFRS 5 with the recognition on a single line of the balance sheet and income statement. For the PCG, the subsidiary’s accounts are drawn up at net asset value.
For management in Talentia Consolidation and reporting, the three accounts are required to switch to manual posting or automatic posting after entry or automatic import of all balance sheet and income statement items to be reclassified as Discontinued Operations in a specific report.
Finally, the IFRS Referential and the PCG consider that Non-compliance with banking covenants may activate (unless agreed by Waiver) an early repayment clause resulting in a reclassification of non-current assets and liabilities as current.