By Albert Otieno
The COVID-19 pandemic crisis and its economic effects mean that investors and other stakeholders need high-quality financial information more than ever before.
ICPAK, accountancy firms, consultancies and regulators such as CBK, IRA AND CMA should quickly make available guidance on the accounting and financial reporting requirements that will need to
be considered in addressing the financial effects of COVID-19 when preparing financial statements. Whereas this
may vary from one industry to another, disclosures are going to be the most important section of the financials to
see the assumptions in the financials for comparative purposes. In this article, we take a look at some of the reporting standards that may be affected by the Covid-19.
IFRS 9 Financial Instruments – Measuring expected credit loss assessments (ECLs) The COVID-19 impact on credit risk will be more severe and immediate in various sectors. IFRS 9 requires companies to incorporate reasonable and supportable information about past events, current conditions and the forecast of future
economic conditions into the assessment of ECLs for financial assets not measured at fair value through profit or loss. Such an assessment should be based on information at the reporting date and adjusted IFRS 13 Fair Value Measurement – FVM
IFRS 13 requires companies to disclose the valuation techniques and the inputs used in FVM. Disclosures are needed to enable users to understand whether COVID-19 has been considered for the purpose of FVM. Key consideration is what conditions and the corresponding assumptions known or knowable to market participants at the reporting date. For example banks revaluation of their investments in shares of other companies
should include disclosures on the knowable effects of Covid-19 to such firms.
This will involve measurement based on unobservable inputs that reflect how market participants would consider the effect of COVID-19 in their expectations of future cash flows related to the asset or liability at the reporting date.
Since the volatility of prices on various markets has also increased, this affects the FVM either directly – if fair value is determined based on market prices in case of shares or indirectly – if the valuation
technique is based on inputs that are derived from volatile markets. Such volatility and assumptions used in the fair value measurement of such assets should be captured well in the disclosures for ease of understanding of the consumers of the reports IAS 10- Events after the Reporting Period Judgment is required in determining
whether events that took place after the end of the reporting period are adjusting or non-adjusting events. This will be highly dependent on the reporting date and the specific facts and circumstances of each company’s operations. Management may need to continually review and update the assessments up to the date the
financial statements are issued given the fluid nature of the COVID-19 crisis and the uncertainties involved.
If management concludes the impact of non-adjusting events are material, the company may be required to disclose the nature of the event and an estimate of its financial effect. Examples of nonadjusting events that would generally be disclosed in the financial statements include breaches of loan covenants, major restructuring, significant declines in the fair value of investments held and abnormally large changes in asset prices after the reporting period. In Kenyan setup, loan covenants and restructuring will form part of non-adjusting events
that are material based on the CBK guidelines to banks to offer one year moratorium to borrowers and allow for
IAS 1- Going Concern assessment Presentation of Financial Statements requires management to assess a company’s ability to continue as a going concern. The going concern assessment needs to be performed up to the date on which the financial statements are issued.
Material uncertainties that cast significant doubt on the company’s ability to operate under the going concern basis need to be disclosed in the financial statements. It is highly likely that many companies large
and small, and particularly in certain sectors like flower farms, hotel industry and aviation firms will have issues
relating to the current situation that need to be considered by management. There will be a wide range of factors to take into account in going concern judgments and financial projections including travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of suppliers
and customers and their effect on expected profitability and other key financial performance ratios including information that shows whether there will be sufficient liquidity to continue to meet obligations when they fall due.
Management should assess the existing and anticipated effects of COVID-19 on the company’s activities and the
appropriateness of the use of the going concern basis. If it is decided to either liquidate or to cease trading, or the
company has no realistic alternative but to do so it is no longer a going concern and the financial statements may have to be prepared on another basis, such as a liquidation basis. In Kenyan setup, ICPAK and other lobby institutes can champion treasury to bail out such companies so they remain a going concern.
This may not be exhaustive so feel free to add other standards and how you feel COVID-19 will affect its reporting.