What Covid-19 disclosures to expect in 2022 financial statements

COVID-19 has affected both countries and corporations unevenly. Some businesses have even benefited from the pandemic as existing trends, like online shopping, have accelerated or because spending patterns shifted towards consumption at home. However, most companies have seen their businesses disrupted by the interruption of operations, dwindling demand, the value of mitigating actions, and challenges around financing.
Moores Rowland organization surveyed disclosures within the IFRS financial statements of quite 120 companies that published their annual financial statements as of 30 June 2020. COVID-19 disclosures in these financial statements can broadly be grouped into four clusters:

  • Going concern;
  • Recover-ability of assets;
  • Income statements;
  • Financial instruments;

Disclosures within the first cluster involve going concern, viability, liquidity, and financing. They address the immediate question of whether an organization is in danger of a sudden stop because its business is no longer viable or a result of difficulties in financing operations. These going concern assessments may consider a worst-case scenario modeled over several years and address the entity’s flexibility to satisfy financial obligations, taking under consideration any mitigating actions it might expect to require.

The next cluster of disclosures deals with the recoverability of assets, which incorporates impairment testing of assets and goodwill, provisions for expected credit losses, inventory valuation, and recoverability of deferred tax assets. These disclosures provide information about the impact of COVID-19 on the companies’ performance, but they’re also forward-looking.
In particular, the disclosures during this cluster around impairment testing triggers, scenario analyses, key assumptions, and sensitivities can provide deep insights that help investors understand how new developments may affect an entity. For instance, an airline disclosed that a part of its fleet is predicted to be grounded for the foreseeable future and tested impairment separately. This was followed by a close sensitivity analysis within which the airline outlined its recovery plan.
The third cluster of disclosures covers income statements and involves revenue recognition, cost of sales, and Alternative Performance Measures (APMs). Disclosures around revenue vary as they address issues like rebates, variable consideration and revenue reversal, and the disclosure of revenue in both pre-COVID-19 and post COVID-19 reporting periods.
Costs of sales are affected in various ways: incremental costs are resulting from prevention measures taken, abnormal and unproductive production costs (e.g., operations well below capacity), and costs of spoilage where finished goods had to be destroyed.
Surprisingly, Moores Rowland’s research indicates that the utilization of COVID-19-adjusted APMs within the financial statements has been limited. This can be likely thanks to the regulators’ require caution before using APMs to disclose the impact of Covid-19.
The final cluster of disclosures concerns financial instruments,  loan modifications, loan covenants, hedge accounting, expected credit losses, liquidity, concentrations of risks, and related judgments and estimates. Financial institutions provide the initial extensive disclosures about these issues, but the pandemic has impacted most companies beyond their ordinary worst-case forecasts for 2020, so disclosures are seen more widely.
For example, an entity disclosed that its forward exchange contracts were not highly effective which hedge accounting on this stuff had been discontinued, as foreign revenue was less than expected. Another entity also named the final processes that it undertakes for expected credit losses (ECLs) in a very “normal” environment with additional specific areas considered this year and explained how its assessment of the ECL rate changed in various overdue categories.