Covid – disclosures and accounting in the annual report and accounts; delayed filing
Clients will be considering what to disclose in their annual report and accounts in relation to the COVID-19 crisis. The reasoning differs between those with a year end of 31/12/19 or even 31/1/2020 and those with a year end falling within formal lockdown such as 31/3/2020 and later. The FRC has produced a range of very helpful guidance.
Consider first the rules around post balance sheet events. If new information comes to light after the year end, companies need to assess whether that information constitutes an adjusting post balance sheet event informing of the situation at the year end date.
What may need to be adjusted will depend on which assets and liabilities are affected, for example, if the new information indicates that assets were impaired at the year end, those asset values may need to be reduced in the accounts. If the information is only about events after the balance sheet date, it is a non-adjusting post balance sheet event which will only require disclosure if material.
In its Guidance for companies on Corporate Governance and Reporting – Update March 2020 (COVID-19), the FRC states that “there is a general consensus that the outbreak of COVID-19 in 2020 was a non-adjusting event for the vast majority of UK companies preparing financial statements for periods ended 31 December 2019”. The FRC guidance should be followed on the type of disclosures to be made on non-adjusting post balance sheet events.
For companies with a 31 March 2020 year end, there are likely to be more consequences for the financial accounts themselves, not just on the disclosures or narrative reporting, as that date fell in the middle of the escalating effects of the pandemic in the UK.
In terms of the impact of the pandemic on a company’s financial statements, anything that relies on forecasts of future cash flows and results will be affected. This includes:
- Going concern assessments, which rely on expectations about future trading results and cash flows.
- Impairment tests on assets (including goodwill arising from M&A), as values are supported by expectations on what the assets will generate in cash and earnings.
- Provisions, for example, for onerous contracts where the customer is unable to continue paying for ongoing delivery of goods or services. Note, however, that accounting standards do not generally allow provisions to be made for future expenses or operating losses.
- Bad debts, where customers are defaulting, and loan loss provisions for banks.
- Contingent liabilities, where there is a possible liability but there is too much uncertainty to assess whether the liability exists and/or its amount, and so only disclosure is given. Contingencies could include, for example, compensation to customers for unfulfilled orders where disputes have arisen.
- Contingent assets, for example, expected insurance proceeds for business interruption. In general, the relevant accounting standard only allows the asset and gain to be included in the accounts when it is virtually certain; before that it will just be disclosed as a contingent asset.
As events progress and things become clearer, companies may be able to make better narrative disclosures about expectations on the future of their business in their annual reports, but the most important thing is to give as clear a picture as possible and acknowledge uncertainties as at the date of publication.
Although leeway has been given on the deadlines for publishing and filing accounts it is not necessarily helpful to delay publication just in the hope of more clarity, given that it may be a considerable time before companies have genuine clarity over their futures.
While delay may tempting you run the continuing risk of identifying post balance sheet events for which disclosure must be considered and made. Subsidiaries’ individual accounts may be required to justify intra-group dividend payments which will be hindered if not finalised and filed. Bear in mind also that the possibility to delay filing will, at some point, be withdrawn.
Companies House has announced that it will extend filing deadlines for accounts by three months, being the maximum delay permitted as section 442(5A) of the CA 2006 requires companies to file their accounts within 12 months of the year end. The most important thing to note is that, in order to avoid an automatic penalty, the application must be made before the end of the usual period for filing, for each company within a group.
There is the possibility of changing your accounting reference date in order to lengthen the accounting period and, therefore, give the company more time to finalise the accounts. The new accounting reference date will continue to apply unless and until you make an application to shorten the subsequent accounting period under section 392 of the CA 2006.
Other aspects of the production of true, fair and compliant annual accounts for which FCA guidance may be found include:
- stock take
- going concern and viability, and
- dividends and capital maintenance.