The COVID-19 pandemic will have a significant impact on Financial Reporting for

companies around the world. Discuss the validity of this statement with reference to
specific areas of the financial statements.

INTRODUCTION

Financial reporting is a practice which has seen rapidly growing interest in recent decades as
a result of the strong influx of businesses onto the vast global markets. This involves the
collection of relevant data from a company, which is compiled into financial statements to
provide an overall reflection of how the company is performing. This means that each
individual element of the financial statement is key, as it can heavily influence the portrayal
of business performance to stakeholders of the business. 

However, since COVID-19 began to affect the global population, many claims have
suggested that the pandemic will have a significant impact on financial reporting for
companies on a global scale. This academic essay aims to pinpoint the key factors which
influence the financial statements, which will enable us to draw a fair and reasonable
conclusion on the impacts of the pandemic upon financial reporting. The first factor which
commences the academic essay is the basis of going concern, where the presence of material
uncertainties and the challenges of declaration of going concern are analysed. Secondly, the
basis of accounting estimates is investigated, containing a detailed analysis of both the short
term and long term impacts of the pandemic upon a collection of key estimates conducted in
practice. Finally, the matter of government grants is dissected, providing analysis of the
accounting treatment and disclosure process.

The evaluation of the impacts of these key areas of the financial statements are supported by
critically evaluated and referenced literature throughout, enabling a coherent analysis of each
individual aspect to be presented. All of this literature was collected from academic sources
and analysed to ensure a high level of writer quality and a minimised level of bias.

GOING CONCERN

The going concern basis has a large role to play in financial reporting as it can fundamentally
change a company’s statement of financial position. As outlined in international accounting
standard (IAS) 1, the company won’t be a going concern if ‘management either intends to
liquidate the entity or to cease trading, or has no realistic alternative but to do so’. (IASB,
2020). Companies will assess if they are a going concern by looking at information they have
for at least 12 months after their year end. However, the uncertainty that the COVID-19
pandemic has caused means that this will be a difficult task for management, in particular for
non-essential businesses (Cabinet Office,2020) who have had restrictions placed on their
ability to trade over the last year and could continue to do into 2021. As a result of this it is
likely that management will find material uncertainties over some of their assets and these
uncertainties will have to be disclosed in their financial reports in order to be transparent with
their users. Regardless of whether these disclosures are adequately reported, the auditors
report will have to be modified to include an emphasis of matter paragraph highlighting that
there are disclosures in the report. This means that due to COVID-19 we can expect to see a
significant increase in modified audit reports as companies question the survival of their
entity. 

We have seen a similar situation arise following the collapse of Enron in 2001 which caused
professional indemnity insurance to significantly increase in price. To protect themselves,
auditors altered their threshold for materiality resulting in an increase in modified audit
reports. This reaction was later given the name “auditor conservatism” (Geiger &
Raghunandan,2005). Geiger’s research went on to find a sharp increase in modified audit
reports immediately following the collapse. While the events analysed by Geiger are very
different in nature, it is likely that the resulting consequences from COVID-19 will be similar
as auditors will be more inclined to challenge management’s going concern opinion in order
to prevent them from having legal action taken against them in the future from their
financially struggling clients. Nevertheless, it is difficult to argue that this will result in lots of
companies moving off the going concern basis because the majority of companies will still be
able to assume they will continue to trade into the foreseeable future given their resources
and the fact that they have hindsight when their statements are audited of around 3-6 months.
Evidently COVID-19 will produce an administrative headache for companies management
teams but this will be limited to material disclosures for most companies and they will still be
able to confidently tell the users of their financial statements that they are still a going
concern.

IMPAIRMENT OF ASSETS

 One of the most complex estimates in the financial statements is the impairment of assets, as
it is highly subjective and difficult to measure. As stated in IAS 36 an impairment takes place
when the carrying value of the asset exceeds its recoverable amount. If the assets are deemed
to have an indefinite useful life they are tested annually for impairment, whilst assets with
finite useful lives are only tested when there is an indication that they may have been
impaired at the end of the reporting period. The COVID-19 pandemic has made the future
highly unpredictable causing the measurement of estimates, such as impairments, to be even
more difficult. The impacts of the pandemic may be an impairment trigger for multiple assets,
across all industries. Business entities will have to assess whether different circumstances
arising due to the pandemic are indications that their assets may be impaired and what
implications those impairments could have on their financial reporting.

 Researchers have debated on whether the impairment of assets is associated to big bath
earnings management. Big bath is an unethical practice which leads to managerial
manipulation of the financial reporting during a year where the business had low earnings, by
taking further write-downs to reduce their earnings further. By doing this the firm aims to
generate better results and a better image in future periods (Jordan and Clark., 2004).
Research by Riedl (2004) and Jordan and Clark (2004) found that the impairment of assets
had less of connection with the firms’ economics and a bigger association with big bath
accounting. The management of businesses may view the impairments caused by the
pandemic as an opportunity to practice big bath behavior. Since majority of businesses have
been negatively affected by the pandemic a big bath behavior may be appealing to some.
With the large amounts of impairments taking place because COVID-19, entities may choose
to write-down more of their assets with hopes of a better result for the next financial year.
Management can take advantage over the estimates and discretion used on the impairment of
assets to report opportunistically rather than provide private information about the firms’
performance (Riedl,2004).

As aforementioned, the measurement and recognition of impairments is inherently risky as it

is subject to significant estimation uncertainty, thus it should be carefully reviewed with the
required professional competence and ethics. Businesses should make sure the projections
used in the impairment testing are adjusted to reflect the current business environment
conditions, which may be subject to further change. In addition to the disclosures of IAS 36,
IAS 1 sets out detailed disclosures for cases of high estimation uncertainty, such as disclosing
key assumptions used and key sources of estimation uncertainty. Additional disclosures such
as different scenarios, sensitivity analysis, and possible impacts of change in the key
assumptions may also be used (EY, 2020). These detailed disclosures would help to make the
effects of the pandemic on the impairments more clear to the users of the financial
statements. As we can see the possibilities of financial reporting being affected by
impairments are extensive and businesses should take further action in order to eliminate
possible material misstatements on the assessment of impairments, as well as possible
manipulation and use of unethical accounting methods by the management.

GOVERNMENT GRANTS

Another key area in financial reporting that has been affected by COVID-19 is accounting for
government grants and how to correctly disclose them. This global pandemic caused lots of
distress and worry for companies financially, therefore the government was able to support
them whilst maintaining the economy. Using the accounting standards, principle IAS 20 is
able to recognise a government grant when ‘there is reasonable assurance that the entity will
comply with the conditions attached to them and the grant will be received’ (IFRS). A point
to consider is most companies will be able to apply this standard effectively to give a true and
fair view of the statements in their financial reporting. In addition, for those companies that
have not come across this concept before, might need to adopt new procedures and policies
alongside an appropriate judgement (KPMG, 2020).

Alongside IAS 20 there is an accounting standard in UK GAAP that explains what should be
disclosed regarding government grants, which is FRS 102. It should be noted that the
uncertainty that COVID-19 has brought about has meant that there is a high importance for
disclosures to be included in financial reporting. For a company to receive a government
grant, one disclosure they must include is ‘the accounting policy adopted for grants’
(ICAEW). As noted before, some companies may need to develop these (e.g. small
companies), which might take time for them to fully comprehend and establish in their entity.
Furthermore, staff training on these types of disclosures for IAS 20 may be required, for
example accounting in the right period to avoid any material misstatements. Moreover,
another important disclosure required by companies is to set out the nature of the government
grant (Deloitte, 2020). It can be argued that COVID-19 has had an impact on this area
because shareholders will be particularly interested in the company’s financial transition from
before the global pandemic and during it.

The coronavirus job retention scheme (CJRS) has offered the utmost support to organisations
and self-employed individuals during the pandemic. Under this government scheme, it covers
80% of wages for furloughed staff, those that have been asked to pause their employment
because of COVID-19. By looking at the structure of CJRS it can be assessed to have met the
definition of a government grant, ‘this scheme involves a transfer of resources from
government to the entity’ (PWC, 2020). Companies that undergo their financial reporting
using IFRS have two ways they can present the grant; present separately in the income
statement or in related expenses netted off. This shows that reporters should be clear to which
method they are using and disclose this accurately in their reports. Conclusively, companies
must be clear on whether the income received from the government composes a loan or a
grant (ICAEW, 2020). Without question, COVID-19 has had an impact on financial reporting
regarding the introduction of government grants such as the CJRS. It is argued that this area
of accounting needs to implement more research in order to look at the ‘international
differences’, (Stadler, C. & Nobes, C.W. 2018). Data in this article shows that grants are
utmost important to firms across the globe, a sample in 2013 showed 74% of firms in
Germany utilised government grants. Furthermore, it is critical for firms to present their
disclosures as transparent as possible, to tailor accounting treatments and compare worldwide
for analysis. 

CONCLUSION

In conclusion, we partially agree with the statement that the COVID-19 pandemic will have a
significant impact on financial reporting for companies on a global scale. In the case of our
opening section discussing the declaration of a business in going concern, there will be an
evident increase in administrative expenses and volume of resources assigned to the
evaluation of the financial situation of the company. With most businesses that are
considering the entrance of going concern being placed upon financial struggles, this
additional cost of operations will only amplify their financial problems and may lead to more
companies entering the state of going concern, accompanied with the losses of revenue which
may have been experienced as a result of Covid itself.

Regarding our second section discussing various accounting estimates, the point of
uncertainty is the key factor which the COVID-19 pandemic has had on financial reporting. It
is crucial that managers or other staff members of influence have to deal with many more
unknown factors as a result of the pandemic, as it has created global shifts which are brand
new problems for this generation and the historical data that we have been able to base our
estimates off have decreased in relevance because of the pandemic. The key point is that this
factor of the unknown may create significantly more misjudgements, which may later
decrease the credibility of estimations made in the financial statements.

Finally, the accounting treatment and disclosure of government grants was discussed and
analysed. The key point that COVID-19 has led to a higher level of disclosures to be included
in financial reporting connects strongly to our other conclusions, which outline the increased
level of distrust in managerial conclusions within current market conditions due to the
uncertainty and unpredictability which is present. However, the additional point of the CJRS
must be considered, as the government support of 80% of wages of furloughed staff has
created a drastic change in the level of labour costs for organisations, meaning this significant
government support will result in major changes in financial reports.

REFERENCES 
Bulgaru, C. L., 2016. "Impairment of Assets - Challenges and Critical Acclaim of Current
Impairment Provisions in Accordance with IAS 36, Impairment of Assets," The Valuation
Journal, National Association of Romanian Valuers, 11(2), pp.30-65.

Cabinet Office, 2020, Closing certain Business and Venues in England, viewed 18/11/2020
<https://www.gov.uk/government/publications/further-businesses-and-premises-to-close/
closing-certain-businesses-and-venues-in-england>

Ey.com. 2020. Accounting Considerations Of The Coronavirus Pandemic. [online] Available

at: https://www.ey.com/en_gl/ifrs-technical-resources/accounting-considerations-of-the-
coronavirus-pandemic-updated-august-2020# [Accessed 22 November 2020].

Fargher, N.L. and Jiang, L., 2008. Changes in the Audit Environment and Auditors'
Propensity to Issue Going-Concern Opinions. Auditing, 27(2), pp. 55-77.

Geiger, M., and K. Raghunandan. 2002. Going-concern opinions in "new" legal environment.
Accounting Horizons 16 (March): 17-26.
IASB 2020, IFRS Standards Part A Required Standards and the Conceptual Framework for
Financial Reporting, IASB, London

ICAEW 2020, Coronavirus: How to improve disclosures when preparing accounts in

accordance with FRS 102, viewed 11/11/2020 <https://www.icaew.com/technical/financial-
reporting/uk-gaap/uk-gaap-faqs/coronavirus-how-to-improve-disclosures-when-preparing-
accounts-in-accordance-with-frs-102> 

Icaew.com. 2020. Coronavirus: The Financial Reporting Implications Under IFRS. [online]
Available at: https://www.icaew.com/technical/financial-reporting/ifrs/ifrs-faqs/coronavirus-
the-financial-reporting-implications-under-ifrs [Accessed 22 November 2020].

Icaew.com. 2020. Accounting For COVID-19 Support Schemes. [online] Available at:
<https://www.icaew.com/insights/viewpoints-on-the-news/2020/may-2020/accounting-for-
covid-19-support-schemes>[Accessed 21 November 2020].

Ifrs.org. n.d. IFRS. [online] Available at: <https://www.ifrs.org/issued-standards/list-of-

standards/ias-20-accounting-for-government-grants-and-disclosure-of-government-
assistance/>[Accessed 21 November 2020].

Inform.pwc.com. 2020. Accounting Implications Of The Effects Of Coronavirus: Pwc In

Depth INT2020-02. [online] Available at: https://inform.pwc.com/inform2/show?
action=informContent&id=2044231704086043 [Accessed 22 November 2020].

Jordan, C., Clark, S. (2004), "Big bath earnings management: the case of goodwill
impairment under SFAS No. 142", Journal of Applied Business Research, Vol. 20, No. 2, pp
63-70 

KPMG. 2020. Are Government Grants Recognised In The Right Period And Appropriately
Measured?. [online] Available at: <https://home.kpmg/xx/en/home/insights/2020/03/covid-
19-government-assistance-4a.html> [Accessed 21 November 2020].

Pcaobus.org. 2020. AS 2501: Auditing Accounting Estimates. [online] Available at:

https://pcaobus.org/Standards/Auditing/Pages/AS2501.aspx [Accessed 22 November 2020].
Pwc.co.uk. 2020. In Brief A Look At Current Financial Reporting Issues. [online] Available
at: <https://www.pwc.co.uk/covid-19/accounting-for-government-assistance-in-response-to-
covid-19-pandemic.pdf>[Accessed 21 November 2020].

Riedl, E. (2004). An examination of long-lived asset impairments. The Accounting Review,

79, 823–852. Roychowdhury, S. (2010). Discussion of: Acquisition profitability and timely
loss recognition. Journal of Accounting and Economics, 49, 179–183.

Sacer, I. M., Malis, S. S., & Pavic, I., 2016. The Impact of Accounting Estimates on Financial
Position and Business Performance–Case of Non-Current Intangible and Tangible Assets.
Procedia Economics and Finance, 39, pp. 399-411.

Stadler, C. & Nobes, C.W. 2018, "Accounting for government grants: Standard-setting and
accounting choice", Journal of accounting and public policy, vol. 37, no. 2, pp. 113-129.
[Accessed 21 November 2020].

Www2.deloitte.com. 2020. Accounting Considerations Related To The Coronavirus 2019

Disease. [online] Available at:
<https://www2.deloitte.com/content/dam/Deloitte/mt/Documents/audit/IFRS-in-
Focus_COVID-19_March_27_2020.pdf>[Accessed 21 November 2020].