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  • Impact on Financial Reporting

Impact on Financial Reporting


Global reactions and responses to coronavirus (COVID-19) continue to evolve and change. The implications of this virus are far reaching. It’s impacting the daily operations and economics of many countries and businesses. The resulting impact on financial reporting will be significant. With the concerns over spreading illness, countries have implemented protective measures including:

  • Restrictions on the movement of people;
  • Cancellation of conferences and large meetings;
  • Work-from-home arrangements for personnel;
  • Closures of facilities, head offices, operating branches; and
  • Limits on non-essential travel.

The United Arab Emirates (UAE) is not spared of ongoing and widespread pandemic - malls, business centres and public places are closed, airlines are grounded, companies are directed to enable work from home for their employees and majority businesses are facing sharp and significant dip in their business. In this article we would like to summarise the potential impact of COVID-19 on financial reporting.

Broadly we are summarising key consideration on financial reporting, audit and other related consideration in two financial reporting segments, i) Entities having financial year end December 31, 2019 or earlier, and ii) Entities having financial year end on and after January 31, 2020.

Significant development and spread of the coronavirus did not take place until January 2020. At December 31, 2019, only certain events and associated actions had taken place, such as the Wuhan Municipal Health Committee’s issue on December 30, 2019.

Although cases were reported to the World Health Organization (WHO) on December 31, 2019, the WHO did not announce the coronavirus as a global health emergency until January 30, 2020, which prompted national governments to begin putting actions in place to slow the spread of COVID-19. In addition, significant measures taken by the Chinese government and by private sector organizations did not take place until early 2020. Subsequent market disruptions in February 2020 confirmed the significance of the January developments.

Based on the timing of these events, for calendar year-end companies, the effects of the coronavirus represent a subsequent event that is not expected to impact amounts recognised in the year-end financial statements (i.e., a non-adjusting subsequent event). Accordingly, forecasts, projections, and associated assumptions used for aspect like impairment review while preparing financial statements as of December 31, 2019 is expected to reflect either little or no change solely as a result of the COVID-19 outbreak.

For entities having year end on and after January 31, 2020, the effects of the COVID-19 need to be incorporated into the preparation of financial statements.

In order for a creditor to invoke Article 273 in order to cancel a contract for temporary or partial force majeure, it will need to prove that performance has become impossible. Previous cases in the UAE have demonstrated that the courts require that the event was unforeseeable and unavoidable.  Note that there is a related provision in Article 472 which states that a right is extinguished if the debtor can prove that performance of it has become impossible due to an extraneous cause in which he played no part.

The effects of the COVID-19 are widespread and relate to many industries; they are not limited only to entities operating directly in the travel and tourism industry (e.g., airlines, tour operators, etc.). COVID-19 may affect entities in nearly every sector, due to the following and other impacts:

  • Reduced consumer demand for goods and services due to lost income and/or restrictions on consumers’ ability to move freely;
  • Disruption of global supply chains due to restrictions placed on the movement of people and goods;
  • Lack of investment in capital improvements and construction, reducing demand for many goods and services; and
  • Reduction in market prices for commodities and financial assets, including equity and debt instruments.

The financial reporting implications for entities may be similarly broad, and the precise effects will depend on the facts and circumstances of each entity. As time elapses and the effects of the outbreak change and evolve, it may become difficult to distinguish which information and facts and circumstances should be incorporated into measurement as of period end and which should result in potential subsequent events disclosure.

Subsequent Event:

  • Entities having year end December 31, 2019 or earlier: Include subsequent events disclosures, to the extent significant, in the financial statements.
  • Entities having year end on and after January 31, 2020: As a best practice, consolidate the disclosure impacts of COVID-19 into a single footnote (even if the footnote references detailed disclosures in other sections of the financial statements.

Debt Classification and Covenant Review:

  • Consider the impact of COVID-19 on debt covenants. If covenant violations are expected, review of classification of the debt and disclosures in respect of covenant breaches.

Going Concern Assumption:

  • Review of going concern assessment taking account of expected impact of COVID-19 to result in going concern issues, include the effects in the financial statements, and address the going concern issue in the disclosures.


  • The effects of the COVID-19 outbreak should not be considered in impairment of financial and non-financial assets when reporting on years ending on or before December 31, 2019. Consequently, forecasts, projections, and valuations for impairment calculations as at December 31, 2019 will need to be carefully reviewed to ensure that significant events related to the COVID-19 outbreak are not being incorporated in hindsight. However, if these estimates are expected to change significantly due to the factors brought on by COVID-19 after year end, additional disclosures should be considered.
  • In periods ended after the outbreak of COVID-19, the impact on expected credit losses and future cash flow projections used in impairment testing will need to be considered.

Revenue Recognition:

  • The amount of revenue recognized and the pattern of revenue recognition may be impacted by COVID-19. Entities may need to account for returns and refund liabilities.
  • Consider the example of large conglomerates with flexible return policies and consumers stocking up non-perishable items. These unused goods may be returned once the virus has stabilized. Event organizers and private education centers may provide tuition refunds for cancelled classes and events.
  • For entities that recognize revenue over a long period of time, the pattern of revenue recognition may change for delays in rendering services.

Debt Restructurings:

  • In an uncertain economic environment, an entity may have a decline in cash inflows and as such may seek additional financing, revise repayment terms and interest rates of existing debt agreements, or request waivers if they no longer satisfy debt covenants. Such revisions may have an impact on the classification and measurement of financial liabilities presented on the balance sheet.


  • Entities that have business disruption insurance may be entitled to a certain amount of insurance proceeds to cover some or all costs. In addition, there may be government grants/incentives available to help support businesses. In many cases, determining if an entity is covered or eligible will require a detailed analysis of the policy or grant criteria. Given that we’re in unprecedented times, careful technical interpretation of the policy/grant criteria and the accounting standards is required to determine the appropriate presentation and disclosures.


  • Transparent disclosures should be made on the effects and risks of this outbreak on the company. This disclosure would generally provide information on the nature of the event and a qualitative or quantitative estimate of its effect on the financial statements. Entities—especially listed ones—will have to consider this from both a financial statement standpoint and for their other public disclosure documents, including the Management Discussion & Analysis (MD&A) and Annual Information Form (AIF).

Some of consideration may not have a past precedents, answer may be constantly evolving along with the situation.