COVID-19 and interim reporting
Get a better understanding of the current challenges management and auditors face for calendar year-end companies heading into the first reporting period of 2020. We also cover important interim reporting reminders in light of COVID-19.
For many calendar year-end companies reporting under IFRS, the first quarter of 2020 will be the first reporting period when the impacts of COVID-19 are reflected in the financial statements.
Interim financial statements typically focus on updates to the annual financial statements. Given the circumstances, we expect that they will likely include significantly more information than for most quarters. This is because of the requirements in IAS 34 Interim Financial Reporting to provide an explanation of events that are significant to an understanding of the financial statements since the end of the last annual reporting period.
For many entities, COVID-19 will create a need for such disclosure. Given the challenges to making appropriate disclosures of these matters in interim financial statements, it may be appropriate to discuss them with your auditor early in the preparation process.
Important information for management and auditors
We have highlighted below a few interim reporting reminders for management and auditors. It is not a substitute for examination of the standards or consultation with professional advisors.
Going concern
The consequences of COVID-19 may significantly impact going concern assessments.
If, through the auditor's understanding of the entity and its environment or during the performance of the interim review, the auditor becomes aware of events or conditions that may cast significant doubt on the entity's ability to continue as a going concern, additional procedures are required (paragraph 11 of Section 7060 Auditor review of interim financial statements).
This topic is addressed in greater detail in our blog on COVID-19 and going concern.
General principles for recognition and measurement
The principles for recognizing and measuring assets, liabilities, income, and expenses for interim periods are typically the same as in the most recent annual financial statements.
The preparation of interim financial reports generally will require a greater use of estimation methods than annual financial reports. For example, management may find it particularly difficult to develop assumptions underlying significant accounting estimates during the interim period as a result of the significant economic uncertainty and volatility. Estimates should be made based on the best available information at the time and updated in subsequent periods.
Impairment
An entity applies the same impairment testing, recognition, and reversal criteria for financial and non-financial assets at an interim date as it would at the end of its financial year. Given the issues arising as a result of COVID-19, many entities may conclude that impairment indicators exist for the quarterly reporting period that would trigger tests for potential impairment.
Where impairments are recognized during the interim period, there are disclosure considerations set out in the relevant IFRS.
It is important to note that IFRIC 10 Interim Financial Reporting and Impairment does clarify that if an impairment test is performed in an interim period and results in the write-down of goodwill, the impairment loss must be recognized in the interim period and not reversed in a subsequent period.
Events after the interim period
The evaluation of subsequent events is also required for interim reporting periods. While the impact of COVID-19 may have affected various items in an entity's interim financial statements, this does not mean that all COVID-related events after the interim reporting date are adjusting events. Events after the interim period should be carefully assessed to determine whether they provide evidence of conditions that existed at the end of the interim reporting period or whether they represent new information.
Challenges for auditor reviews of interim financial statements
Conducting a review of interim financial statements may be challenging because of COVID-19. For example:
- entities may not have the resources to address on a timely basis all of the accounting issues that interim financial statements may present
- entities may have difficulty in providing the auditor with the information the auditor requires when conducting the review, for example, relating to new or significantly changing accounting estimates
- some commonly performed interim review procedures, such as comparing interim results with expected results, such as budgets or forecasts, or comparing current results to prior periods, ratios or other performance measures may not be effective
- there may have been changes in internal controls during the first quarter that introduce potential significant deficiencies that will require further review procedures
- inquiries of management may require more time to complete if there have been, for example, significant changes in the entity's business practices, unusual transactions, significant subsequent events, or uncorrected misstatements
- there may be greater opportunity for management bias in the preparation of the financial statements, or actual or suspected fraud
It will be important for preparers and auditors to allocate sufficient time and appropriate resources to perform interim reviews during this time, given the challenges and increased work effort that are anticipated in light of the effects of the COVID-19 pandemic.
Where can you go for help?
View our dedicated and regularly updated COVID-19 financial reporting and auditing resource hub.
Check it out
COVID-19 implications on going concern assessments
Listen to this webinar and hear representatives from the Canadian Public Accountability Board (CPAB) and the Auditing and Assurance Standards Board (AASB) share their perspectives about the implications of COVID-19 on going concern assessments.
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Are there specific COVID-19 related auditing and financial reporting issues where you believe further guidance from CPA Canada could be helpful? Post a comment below or email us directly.
Conversations about Audit Quality is designed to create an exchange of ideas on global audit quality developments and issues and their impact in Canada.
Disclaimer
The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.
