Our Covid-19 financial reporting resource centre provides guidance on a broad range of financial reporting topics impacted by the Covid-19 outbreak. It covers both annual and interim financial statements.
What’s the issue?
For calendar year end companies, the 2020 interim reporting period will be the first reporting period when the impacts of the Covid-19 coronavirus outbreak are reflected in the financial statements – i.e. it will affect the measurement and recognition of assets and liabilities, income and expenses.
IAS 34 Interim Financial Reporting generally requires that all events and transactions are recognized and measured as if the interim period were a discrete stand-alone period – i.e. there are generally no recognition or measurement exemptions for interim financial reporting. [Insights 184.108.40.206]
Condensed interim financial statements (hereafter referred to as ‘interim financial statements’) typically focus on changes since the last annual financial statements. Companies are required to provide an explanation of events and transactions that are significant to an understanding of the changes in their financial position and performance since the last annual reporting date. Information disclosed in relation to those events and transactions updates the relevant information presented in the most recent annual financial report. Given the rapidly changing economic outlook and trading conditions, information in 2020 interim financial statements may, for many companies, comprise more than the usual update since the last annual financial statements. [IAS 34.15]
If changes in circumstances have made significant disclosures in the last annual financial statements less relevant, then a company needs to consider providing additional supplementary disclosures in its interim financial statements. [Insights 220.127.116.11]
Although many disclosures required by other IFRS® Standards are not mandatory in interim financial statements, in the current circumstances, companies may need to provide these disclosures to ensure that the interim financial statements provide relevant and reliable information and adequate level of disclosures and transparency to the users of those statements. beyond what is typically disclosed.
Getting into more detail
Recognition, measurement and disclosure in interim financial statements
Generally, items are required to be recognized and measured as if the interim period were a discrete stand-alone period. However, there are specific requirements for income taxes. [Insights 18.104.22.168]
We address below some of the key areas that companies may need to consider when preparing their 2020 interim financial statements. Whether they are relevant depends on the company’s specific circumstances – i.e. the nature and extent of Covid-19 impacts on the financial position, performance and cash flows of the company.
Management’s going concern assessment may be significantly affected by the current circumstances.
The considerations that apply for the going concern assessment when preparing annual financial statements also apply for interim financial statements. When assessing the uncertainties associated with a company’s going concern assumption, management takes into account all available information for a period of at least 12 months from the date of the interim financial statements, including whether a company will have sufficient liquidity to continue meeting its obligations as they fall due. For example, when a company with a calendar year end prepares its quarterly interim financial statements at 31 March 2020, it considers information for the period until, but not limited to, 31 March 2021 when assessing whether the going concern assumption is appropriate. [Insights 22.214.171.124, 35]
If there is a material uncertainty about the company’s ability to continue as a going concern at the date on which the interim financial statements are authorized for issue, then that uncertainty is disclosed in those interim financial statements. This is the case irrespective of whether it was disclosed in the most recent annual financial statements. In addition, disclosure is required when management concludes that there are no material uncertainties but reaching that conclusion involved significant judgement (a ‘close call’). [Insights 1.2.80, 126.96.36.199]
For further information on Covid-19’s impact on going concern, see our blog on
Impairment of non-financial assets
Reviews for indicators of impairment and any resulting tests for impairment of non-financial assets are performed at the interim reporting date in the same manner as at the annual reporting date. [Insights 188.8.131.52]
Companies may have tested their goodwill and intangible assets1 for impairment under IAS 36 Impairment of Assets when preparing their latest annual financial statements. However, given the current economic circumstances, there may be indicators of impairment at the interim reporting date that cause these assets (or other non-current assets) to be tested again for impairment. Therefore, companies may have to carefully reassess and update the cash flow projections and discount rates used in calculating the recoverable amount.
If a company recognizes a material impairment loss on non-financial assets, then it must provide in its interim financial statements an explanation of and an update to the relevant information included in the last annual financial statements. IAS 36 provides relevant disclosures to be considered in this regard. [IAS 34.15B(b), 15C]
Impairment of financial assets
Companies apply the same criteria when testing for impairment of financial assets as they do on the annual reporting date.
If a company recognizes a material impairment loss on financial assets, then it provides in its interim financial statements an explanation of and an update to the relevant information included in the last annual financial statements. IFRS 7 Financial Instruments: Disclosures provides relevant disclosures to be considered in this regard. [IAS 34.15B(b), 15C]
Fair value measurement
The carrying amount of assets that are measured at fair value – e.g. investment property – is determined at the interim reporting date.
Performing a valuation that uses significant unobservable inputs becomes more challenging in the current environment and, given the current market volatility, extrapolations based on the balance at the previous annual reporting date may not be appropriate.
Companies may need to consider using external valuers to determine the fair value of assets for which quoted prices are not available. This includes determining the fair value of non-financial assets – e.g. PPE and right-of-use assets that are valued using the revaluation model, and investment properties.
Where external valuers are used, it is important for companies to consider how any caveats or material valuation uncertainty clauses included in the external valuers’ reports may impact interim financial statements – for example, whether the fair value measurement appropriately includes the necessary risk adjustment to reflect the significant measurement uncertainty.
The specific disclosures required by IAS 34 for fair value measurement need to be provided.
If Covid-19 significantly impacts the fair value measurement, European Securities and Markets Authority (ESMA2) expects companies to provide updated disclosures on the significant judgments and assumptions underlying these assessments and the sensitivity analysis as required by paragraphs 122 and 125 of IAS 1.
Tax reliefs: In response to the Covid-19 outbreak, governments may introduce tax reliefs for certain types of income, additional tax deductions, a reduced tax rate or an extended period to use tax losses carried forward. Companies recognize tax credits that relate to a one-off event in the interim period in which the event occurs, rather than reflect them in their estimate of the annual effective tax rate. Conversely, a change in the tax rate that is substantively enacted in an interim period may be recognized as a one-off event or spread over the remainder of the annual reporting period via an adjustment to the estimated annual effective tax rate. [IAS 34.IE.B19, Insights 184.108.40.206–35] Moreover, ESMA2 recommends that companies provide transparency regarding the application of these measures in terms of eligibility, conditions and consequences as well as in terms of the underlying judgements made.
Recoverability of deferred tax assets: A deferred tax asset is recognized for deductible temporary differences and unused tax losses (tax credits) carried forward, to the extent that it is probable that future taxable profits will be available. The Covid-19 outbreak may affect a company’s projections of the probability of future taxable profits, which in turn could affect the recognition of deferred tax assets at the interim reporting date.
In response to the Covid-19 pandemic, the International Accounting Standards Board (the Board) issued amendments to IFRS 16 Leases, a practical expedient that allows lessees to not assess whether an eligible rent concession is a lease modification.
If this practical expedient is used, the lessee accounts for any change in lease payments resulting from the rent concession the same way it would account for the change when applying IFRS 16 Leases, if the change were not a lease modification. KPMG’s guide to accounting for rent concessions includes practical guidance and examples.
Companies following IFRS Standards as adopted by the European Union should note that the European Financial Reporting Advisory Group (EFRAG)3 submitted its endorsement advice for use in the European Union and European Economic Area on 3 June 2020. The amendment to IFRS 16 Leases is expected to be endorsed in Q3/Q4 2020. Once endorsed, early application is permitted, including in financial statements not yet authorized for issue at 28 May 2020.
In the current market conditions, companies should ensure that the minimum disclosure requirements of IAS 34 are supplemented by additional disclosures, if they are relevant to an understanding of their interim results, position and cash flows, including:
- changes in significant judgements and assumptions made by management, as well as areas of estimation uncertainty as required by IAS 1; and
- overarching disclosures of the impact of the Covid-19 outbreak on the interim financial position, performance and cash flows. [IAS 34.15, 15B(d), 15C, IAS 1.17(b)–(c), 122, 125]
IAS 34 contains other specific disclosure requirements for financial assets and/or financial liabilities. [IAS 34.15B(h), (k), (l), 16A(j)]
Some regulators4 have emphasized that, given the magnitude of the latest economic changes, companies should provide in their interim financial statements sufficient disclosure for investors to understand the significant events and transactions that have occurred since the annual financial reporting date. [IAS 34.15B, 16A]
Interim management reports
ESMA2 recommends companies to provide detailed and entity specific information in their interim management reports regarding:
- the impact of Covid-19 pandemic on their strategic orientation and targets, operations, financial performance, financial position and cash-flows;
- measures taken to address and mitigate the impacts of the Covid-19 pandemic on their operations and performance and their progress/state of completion; and
- where available, the expected future impact on companies’ financial performance, financial position and cash-flows, related risks and contingency measures planned to mitigate the expected future impact and risk and uncertainties identified.
Actions for management to take now
- Assess the company’s ability to continue as a going concern at the interim reporting date.
- Consider whether information disclosed in the last annual financial statements remains relevant. If not, then provide updated disclosures.
- Assess and reflect the impacts of the Covid-19 outbreak in the interim financial statements – in particular, whether uncertainties are factored into all the necessary estimates and judgements.
- Assess whether the disclosures and explanations provided in the interim financial statements are sufficient for users to understand the significant events and transactions that have occurred since the annual reporting date.
- Provide additional disclosures to enable users of interim financial statements to understand the overall impact of the Covid-19 outbreak on the financial position and performance of the company.
- 1 Intangible assets with an indefinite useful life or intangible assets that are not yet available for use.
- 2 ESMA statement issued on 20 May 2020, ESMA calls for transparency on Covid-19 effects in half-yearly financial reports
IASB statement issued on 28 May 2020, IASB issued amendment to IFRS Standard on leases to help lessees account for Covid-19-related rent concessions
- 3 EFRAG statement issued on 3 June 2020, EFRAG’s Endorsement Advice on Covid-19-Related Rent Concessions (Amendment to IFRS 16)
- 4 ESMA statement issued on 25 March 2020, Accounting implications of the Covid-19 outbreak on the calculation of expected credit losses.
References to ‘Insights’ refers to our publication Insights into IFRS
For further information on the financial reporting implications of the COVID-19 pandemic, please go to our COVID 19 | Financial reporting resource centre, which is continually updated as significant accounting and reporting issues arise. We encourage you to bookmark this page and check back frequently for updates.