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Financial reporting in an uncertain climate

Chris Smith Chris Smith

Financial reporting is challenging while the current circumstances are creating constant uncertainty about what the future will look like. Jonathan Shaw explains how you can keep your information accurate and current to help your business move beyond the COVID-19 situation.

There are several key areas that management should consider when assessing and financial reporting the impact of COVID-19 on the business. Every business should be identifying and evaluating the uncertainties that need to be factored into each of those reporting areas that are most affected.

Both COVID-19 itself and government measures attempting to manage its spread have rapidly changed both social and economic conditions with an impact on almost all businesses including those that prior to COVID-19 had both strong performance and balance sheets. Supply and production chains throughout the world are disrupted. Demand for many goods and services, especially in the travel, retail and venue-based entertainment sectors is drastically reduced. This, in turn, has put pressure on lenders, such as banks and other financial services providers, and insurers that provide protection to impacted entities. It will also have an impact on funds or other investors that hold positions in affected entities/industries. A few sectors, such as supermarkets, food producers, the medical sector, some pharmaceutical providers and those with a strong online offering, may benefit.

As well as the immediate impact, the situation has led to deep, longer-term economic uncertainty. Entities face challenges in reflecting these conditions in the forecasts and estimates that underpin many areas of reporting and accounting. Doing so will require the use of scenario analysis and stress testing. In particular, for the purpose of going concern and viability reporting, the rapidly changing situation means that assessments quickly become outdated.

Key financial reporting areas to consider

The financial reporting areas most likely to be affected include all those that rely on forward-looking information. The list below, which is not exhaustive, summarises the most-prevalent areas, but each entity should carry out its own assessment and update this as the situation develops.

  • The strategic report, including principal risks and uncertainty disclosures
  • Going concern and, in the case of companies applying the UK Corporate Governance Code 2018, viability statements
  • Impairment of non-financial assets and determination of recoverable amounts
  • Impairment of financial assets, including lease receivables and contract assets
  • Fair value of assets and liabilities
  • Other areas involving estimation uncertainty
  • Disclosure of significant judgements made
  • Audit reporting

Consistency between the front-end narrative reporting and the back-half disclosures in financial statements, as well as the adequacy of disclosures made, will also be of vital importance.

For more information, contact Chris Smith.

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