For some time now, we've been living in a hostile pandemic. COVID-19. Some say that the world will never be like it used to be, and you have to get used to the new working conditions.
Not only doctors, but also the whole business world, financiers, including, of course, accountants, who are obliged to best reflect the new reality of their businesses in financial statements.
How can we do this reliably and taking into account all the necessary elements so that the company's image is correct in these unusual pandemic conditions? This is addressed in this article. We encourage you to read and reflect on the challenges that have arisen with the pandemic and remain very current.
The Accounting Standards Committee (CRS) published recommendations entitled “The Financial Report during the pandemic COVID-19”. The document is addressed to the persons responsible for drawing up the accounts, as well as stakeholders who expect reliable and clear information on the financial situation of the entities. The purpose of the recommendation is to support those responsible for accounting when deciding on the impact COVID-19 in the accounts and in the accounts drawn up on the basis of those books.
The result of obtaining answers to the above questions is either the acceptance of a non-threatening continuation of the entity’s activities, or the disclosure in the financial statements of any uncertainty which, although the continuation is not threatened, may affect the functioning of the company
Assessment of the company’s condition
The CRS in its study raised issues that have a significant impact on the functioning of the company during the pandemic and must be properly included in the accounts. These issues included:
- continuation of operations,
- inventory,
- financial support under the so-called Crisis Shield,
- additional operating costs due to the pandemic,
- the valuation of assets and liabilities to take account of the economic impact of the pandemic,
Valuation of products with unused effect COVID-19 production capacity.
Among the issues mentioned above, which require specific treatment in the accounts, it is crucial to continue. How, therefore, to assess the company’s current condition and its prospects for operation in the coming years 12 months from balance sheet date?
How exactly do I put this information in the accounts and how to prepare to discuss such an important issue with statutory auditors in order to jointly obtain answers to these questions, as well as whether and to what extent this continuation is preserved and how accurately to present the company's situation in the current and foreseeable time horizon in conditions of uncertainty caused by pandemic factors?
The entity’s ability to continue to operate is assessed by the entity’s head, i.e. in practice its management. Supervisory persons - and in the case of public interest units, also the audit committee - are responsible for the correctness of the unit manager's acceptance of the assumptions of continuation. The CRS recommends that the unit manager consider assessing the continuation of operations 3 Key issues:
- 1) are there circumstances indicating significant risks of continuation, including due to the negative impact of the pandemic?
- 2) Is it reasonable, despite these threats, to assume a continuation of activities?
- 3) is there a significant uncertainty about the assumption of a continuation of business, despite the appropriateness of a continuation?
The result of receiving answers to the above questions is either the acceptance of a non-threatening continuation of the entity’s activities, or the disclosure in the financial statements of any uncertainty which, although the continuation is not threatened, may affect the functioning of the company. Of course, in the extreme case, the answer to such questions may also result in the adoption of an assumption that the entity does not continue its activities, and therefore the financial statements are drawn up in accordance with the rules laid down in Article 29 and Article 36(3) Accounting Act.
Analysis of the risks of continuation
Several important factors should be taken into account when analysing the risks of continuation. First of all, it is the kind of industry in which the company operates.
As some industries are known to be particularly threatened by pandemics due to their limitations and even if their companies are doing quite well, it is necessary to explain why our company has a chance to survive in the face of the disastrous situation of the entire industry.
The financial condition of existing largest suppliers and key customers of the company is particularly important. It is also necessary to consider whether the entity meets the credit conditions, as well as the financial liquidity and solvency of the company.
These factors should be considered in terms of the current functioning, but also in the foreseeable future. Nor must any other non-financial aspects affecting the company's activities – such as travel bans, pandemic staff shortages and other restrictions – be overlooked.
On the other hand, should take into account positive factors, i.e. all types of funding and relief, different forms of government and non-governmental support, which have an impact on profitability, when assessing the entity's ability to continue operating.
Documenting the assessment of continuation of operations – practical guidance
It is, of course, appropriate to document the assessment of the entity's ability to continue and its results. The actuality of the entity's ability to continue its activities, initially undertaken before the closure of the year, should be verified twice on the date of the financial statements (Article 5(2) Accounting Act) and before its approval (Article 54(1) Accounting Act).
From practical information it is worth to know that the introduction to the accounts indicates:
- 1/ whether the financial statements were drawn up on the assumption that the entity would continue its business activity in the foreseeable future
- and
- 2/ where there are circumstances indicating significant uncertainty regarding the continuation of activities, e.g. related to the pandemic, these specific risks are identified.
By drawing up financial statements in accordance with Annex 1 to the Act in additional information and explanations, in accordance with section 9 The Accounting Act, an entity shall describe in a detailed explanation of the circumstances, indicating the significant risk of continuing operations and stating whether the financial statements contain the related corrections. The information shall also include a description of the actions taken or planned by the unit to prevent adverse effects.
The explanations should include a description of the main events or conditions which may raise serious doubts as to the entity's ability to continue operations, together with a description of the management plans for those events or conditions. It should also be clearly indicated whether there is material uncertainty regarding events or circumstances that may raise serious doubts as to the entity's ability to continue operations and therefore the entity may not obtain the assumed economic benefits from the assets and not be able to regulate the liabilities in the course of normal business.
In the other annexes to the Act, i.e. Annex 4, 5 and 6, there is no such requirement. However, in this case, according to Article 50(1) The laws, the entities should further describe the detailed disclosures necessary to achieve a fair presentation in the accounts, ensuring consistency with the information contained in the introduction, which in practice means that the uncertainty of continuing operations should also be described.
In conclusion, the above considerations on the disclosure of the entity's continued activities under the COVID pandemic19, it should be stressed that it is not worth describing this important issue in the accounts in a schematic manner and putting it at the last minute just before the financial statements were signed.
Long before the report and its possible study are drawn up, the aspects mentioned in the article need to be considered in order to make them clear and sound in the books and then in the final report.
This will certainly also be a good opportunity to identify the risks of the company's operations, which are then easier to prevent and prepare for the main stakeholders – readers of the accounts.
In the following articles, we will consider other issues requiring special attention when drawing up financial statements under pandemic conditions in the current and anticipated form.