There is no doubt that the pandemic of coronavirus SARS-Cov-2 will negatively affect the activities of many entities. This impact, currently difficult to estimate, is putting companies in a situation of uncertainty and may even threaten the continuation of their operations.
A large group of entities in Poland has not yet prepared financial statements for the financial year ended 31 December 2019.
In such circumstances, the following question arises: how is the uncertainty associated with the spread of coronavirus affecting the annual financial statements prepared for 2019. This issue should be considered in the context of events after the balance sheet date (subsequent events) and the assessment of the ability of the entity to continue as a going concern.
Pursuant to the National Standards on Auditing 7, events after the balance sheet date are favourable or unfavourable events that took place after the balance sheet date for which the financial statements for a given financial year were prepared, significantly affecting the data disclosed in that report and about which the entity learned before the date of approving the financial statements. These events are divided into:
- providing evidence of existence of a specific state as at the balance sheet date - the effects of these events should be included in the accounting books and the financial statements of the financial year ending with that balance sheet date,
- indicating the state after the balance sheet date - if these events are significant, they should be disclosed in the notes, with specification of the type of event and the estimated amount of its financial effects or a statement that such an estimate is practically unfeasible.
It should be expected that the impact of coronavirus pandemic will not entail an adjustment of the values disclosed in the financial statements prepared as at 31 December 2019 due to the fact that as at the balance sheet date, the threat arising from the spread of coronavirus was practically unrecognized. The development and speed of the virus spread did not become apparent until 2020, and therefore the situation as at the balance sheet date does not indicate the need to include its impact in the accounting books of 2019. However, it seems that the effects of the coronavirus spread have a significant impact on the economic situation of most entities to the extent that they should be included in additional information, in the note regarding events after the balance sheet date. As situation related to the expansion of the coronavirus pandemic is constantly changing and it is difficult to predict its final impact on the global and Polish economy, and thus on the future activities of each entity, disclosures should be descriptive.
Majority of the financial statements is prepared based on the assumption of going concern in a substantially unchanged scope. In accordance with art. 5 par. 2 of the Accounting Act, when determining the entity's ability to continue as a going concern, the head of the entity should consider all available data as at the date of preparing the financial statements regarding the foreseeable future, covering a period of not less than one year after the balance sheet date.
Currently, for the purpose of preparing the financial statements for 2019, when assessing the ability to continue as a going concern, an entity's manager should take into account the impact of coronavirus pandemic on the entity's situation. There are a number of factors to consider when making this assessment, including threat of significant reduction of the entity's income and at the same time the need to incur fixed costs, which may result in liquidity risk associated with the inability of servicing debts, decrease in the market value of investments held, impairment of non-financial assets held, significant changes in exchange rates, fluctuation of raw material prices, possible disruptions in delivery of goods and materials (in particular originating in China), closing marketing outlets, granting high sureties or guarantees by the company, worse availability of financing, payment gridlocks and many others resulting from the specifics of the industry and entity.
Deterioration of operating results and financial position after the balance sheet date may indicate the need to consider whether the going concern assumption is still relevant.
In case the going concern assumption is justified (according to the head of the entity), but there are circumstances indicating a threat to continue its operations, the introduction to the financial statements should disclose this fact and describe these circumstances. In addition, additional information and explanations should describe the actions taken or planned by the entity to eliminate these threats.
If the assumption that the entity will continue as a going concern in the foreseeable future is not justified, art. 29 of the Accounting Act is applicable, requiring the entity to be valued at net obtainable sales prices, not higher than their purchase prices or manufacturing costs, less current depreciation or amortization write-offs, as well as write-offs for permanent impairment and creating a provision for anticipated additional costs and losses due to abandonment or loss of ability to continue as a going concern.
We should also remember that the report on the entity's activity should include appropriate disclosures relating to the current situation, as, pursuant to art. 49 of the Accounting Act, the entity's report on operations should define risk factors and describe threats, as well as information on events significantly affecting the entity's operations that took place in the financial year and after it, until the date of approving the financial statements, as well as information on the entity's expected development and its current and envisaged financial position.
The entities’ managers are therefore facing an uneasy task; not only to protect their employees and companies from coronavirus, but also to assess the impact of the disease spread and in consequence to assess the entity's ability to continue as a going concern and make appropriate disclosures in the entity's financial statements and the report on the activity.