Health crisis consequences on FY 2019 accounts
Newsletter - April 2020
In the various countries hit by the Covid-19 health crisis, the public authorities took various health measures over the first quarter of 2020 (lockdown, ban on gatherings, etc.) and stopped certain economic activities.
In France, these measures were adopted in March 2020 with the declaration of a state of health emergency.
At international level, the World Health Organisation (WHO) characterised the Covd-19 epidemic as a world pandemic on 11 March 2020.
The accounting authorities have published their official position on the impacts of the current crisis on business accounts.
General rules applicable to post-balance sheet events
According to the French General Chart of Accounts, account must be taken of liabilities arising during the year or in a previous year, even if they become known between the reporting date and the date of which financial statements are completed. This accounting policy is the same for the preparation of consolidated financial statements under French standards.
If a post-balance sheet event is due to circumstances existing on the closing date, the annual financial statements are adjusted accordingly.
If, however, the event has no direct material link with a situation existing on the closing date, the balance sheet and income statement do not need changing, but information must be provided about this event, where it is significant, in the notes to company and consolidated financial statements.
Position of the Accounting Authorities
In a release of 2 April 2020, the French Accounting Standards Authority, ANC, indicated that Covid-19 is a post-balance sheet event for company years ending 31 December 2019 (and prior thereto), unrelated to a situation existing on the reporting date.
The French national auditing body, CNCC, and the national association of public accountants, CSOEC, added that, for entities reporting under IFRS, the assets and liabilities valuation should only reflect the conditions existing on 31 December 2019, without taking the Covid-19 epidemic into account.
Consequences on Accounts for company years ending 31 December 2019
No adjustment to assets and liabilities, income and expenses is to be posted in the financial statements for company years ending on 31 December 2019, in connection with the current health crisis.
As examples, the CNCC and CSOEC specify that:
– the significant decline in stock prices after 31 December 2019 must not be taken into account for financial assets valued at fair value or current value,
– breaches of loan covenants due to the health crisis have no effect on the classification of bank borrowings in the accounts as at 31 December 2019,
– inventories should be valued at the lowest of either the book value and the net realisable value, without taking into account the subsequent effects of the epidemic on prices or prospects of sales,
– provisions should not be posted for costs linked to under-activity in 2020,
– business plans and assumptions used to calculate future cash flows for the purpose of impairment testing should not be changed.
Information to be provided in the Notes to the company and consolidated Financial Statements
The ANC has recalled that the notes should include information if an event having no direct material link with a situation existing on the reporting date occurs between the reporting date and the date on which the financial statements are completed. Qualitative or quantitative information concerning the effects of the health crisis must be included in the notes to the financial statements for the year ending 31 December 2019.
The fact that the crisis has no effect on the company’s business must be mentioned, where this is the case.
The ANC, and the CNCC and CSOEC, have provided numerous examples of relevant information to be mentioned in the notes to financial statements prepared in accordance with French or international standards.
Existence of uncertainties concerning business continuity
Detailed information must be provided in the notes in the event of significant uncertainties due to post-balance sheet events (case of the current crisis) relating to the entity’s ability to continue business.
According to the General Chart of Accounts, the preparation of accounts according to the going concern principle is not called into question by events occurring after the reporting date. When business continuity is considered permanently compromised (voluntary or compulsory liquidation in particular), the information provided in the notes must give details of the type of event and its consequences (presentation of simplified accounts in liquidating value for example).
Note that, under IFRS, companies must adjust their 2019 accounts when the going concern principle is compromised on the reporting date.
Consequences on accounts for years ending after 31 December 2019
For the financial statements of company years ending between 1 January and 11 March 2020, the date on which the WHO characterised the epidemic as a global pandemic, each entity must carry out an analysis, in light of its business activities, to determine whether the Covid-19-related events occurred during the year (in which case the accounts are impacted) or after the year-end (in this case only information in the notes is to be provided).
For years ending after 11 March 2020, the accounts must be prepared taking into account the consequence of events relating to Covid-19.
The monthly newsletter is distributed free of charge to the firm’s clients via email. This document is designed to provide information and may not reflect the most recent legal developments. Clients and readers should not take action or refrain from taking action on the basis of information contained in this newsletter without seeking professional advice.