The current difficult situation concerning COVID-19 infection in the Czech Republic and the series of measures that have been swiftly adopted on a large scale to prevent it from spreading are having an impact on almost all accounting entities to varying degrees. These significant changes should undoubtedly be reflected in the financial statements.
An accounting entity should pay particular attention to the following in its financial statements:
- the appropriateness of using existing accounting and valuation methods,
- impairment of tangible assets and assessment of their economic life,
- valuation of goodwill and other intangible assets,
- valuation of an inventory and its marketability,
- valuation of receivables and their return,
- contractual penalties resulting from non-compliance with contractual terms and conditions,
- endangering the going concern principle.
Recommendation of the Chamber of Auditors of the Czech Republic
In these days, the Chamber of Auditors of the Czech Republic (CACR) has issued recommendations on how to deal with the impact of the COVID-19 pandemic on financial statements. These recommendations are suitable for all accounting entities, whether audited or not.
When assessing the impact of the coronavirus pandemic on financial statements, the balance sheet date, i.e. the date on which the financial statements are prepared, is critical.
Financial statements prepared for the period ending 31st December 2019
As of 31st December 2019, only a few cases of the unknown virus were reported, and its extreme spread and ease of transmission were not anticipated by almost anyone at that time. Therefore, the current crisis situation is considered in the financial statements for the period ending 31st December 2019 as an event after the balance sheet date that does not adjust the information in the balance sheet or profit and loss account. Therefore, it should not affect the measurement of the reported assets and liabilities.
This means for an accounting entity it does not reassess, for example, the amount of adjustments or provisions or does not reduce the value of assets. However, this situation, its specific impacts and management evaluation should be definitely described in the appendix to the financial statements. Users of the financial statements must be made aware of any effects on an accounting entity's future operations.
It is also crucial to assess an accounting entity's going concern in the foreseeable future. If an accounting entity or an auditor concludes that the going concern principle is not met, there is an obligation to adjust the reported amounts because of changes in accounting policies for preparing the financial statements.
Financial statements prepared for the period from 1st January 2020 to 11th March 2020
In this situation, an accounting entity assesses individually whether or not this is a case of an adjusting or non-adjusting event. Field of business and supplier-customer relations are especially important here.
Financial statements prepared for a period ending after 11th March 2020
On 11th March 2020, the World Health Organization declared COVID-19 a global pandemic. Thus, the impact of the emergency and extraordinary measures for financial statements prepared for the period ending on 12th March 2020 and later becomes an adjusting event with a direct impact on the measurement of the reported assets and liabilities. For an accounting entity, this means taking into account the current situation mainly through adjustments for assets, inventories and receivables, through the creation of provisions or classifications of long-term and short-term items.
Recommended procedure determined by the Chamber of Auditors of the Czech Republic for preparing financial statements
The Chamber of Auditors of the Czech Republic also warns about the variability and difficulty of estimating future impacts. It appeals primarily to the individual assessment of these impacts for each accounting entity. Nevertheless, it outlines a certain structure of considerations that should be followed in preparing the financial statements. The most important step is always to assess whether the going concern assumption is not questioned, and the accounting entity is able to continue its business in the near future. The procedure for the preparation of the financial statements as of 31st December 2019 according to CACR is as follows:
- The going concern of an accounting entity is not compromised. If the assumption of a going concern remains valid and there is no significant uncertainty, it is useful to include, for example, the following statement made directly for the CACR in the appendix: “The management of the Company considered the potential impacts of COVID-19 on its activities and business and concluded that they did not have a significant impact on the going concern assumption of the business. Accordingly, the financial statements as of 31st December 2019 were prepared assuming that the Company would be able to continue as a going concern.”
- The going concern assumption remains valid but there is significant uncertainty. The management of an accounting entity is required to explain and describe this uncertainty to continue as a going concern and other related facts in detail in the appendix to the financial statements. The valuation of assets and liabilities as of 31st December 2019 will not be affected.
- The going concern assumption is not valid. An accounting entity is required to comply with the requirements of Section 7 (3) last sentence of Act on Accounting and to use alternative accounting and valuation methods when preparing the financial statements as of 31st December 2019. In particular, the method of valuing assets and recognising liabilities will be different from normal practice. Again, a detailed analysis in the appendix to the financial statements is required.
- Management's opinion on the going concern of an accounting entity in all three previous cases will usually need to be accompanied by some supporting analysis. The following should be taken into account: any significant impacts such as impairment of assets due to the adverse global situation, failures in supplies of goods and materials, disruption of supply and customer relations, lack of future cash resources affecting the accounting unit's liquidity and financial position or termination and unavailability of loans or, if applicable, changes in credit conditions.
The full detailed text of the recommendations can then be found here.
However, for the sake of completeness, it is necessary to mention that the Government and Parliament of the Czech Republic are preparing a system of economic support for entities affected by emergency measures that should mitigate the negative economic impacts, which should be taken into account when analysing the going concern assumption.
Anežka Hájková
Accountant
ASB Czech Republic
ahajkova@asbgroup.eu