"Adding value to the business we serve."

Consideration regarding corona virus outbreak (accounting perspective)

Date : 7/4/2020

Consideration regarding corona virus outbreak (accountingperspective)


This publication, therefore, provides a reminder of theexisting accounting requirements that should be considered when addressing thefinancial effects of the coronavirus outbreak in the preparation of IFRSfinancial statements for the annual or interim reporting periods ending in2020. Disclosure considerations for interim financial reporting are alsocovered in this publication. The issues discussed are by no means exhaustiveand their applicability depends on the facts and circumstances of each entity.


Wewill mention here some impacts of the corona virus outbreak:


Income taxes


Arange of economic stimulus packages have been announced by governments around the world. Recentgovernment responses to the coronavirus outbreak haveincluded income tax concessions and other rebates.Entities need to consider the impacts of these legislative changes on their accounting for incometaxes. IAS 12 Income Taxes requires current tax liabilitiesand assets for current and prior periods to bemeasured at the amount expected to be paid to (orrecovered from) the taxation authority, using the tax rates and laws that were enacted, or substantively enacted, by the end ofthe reporting period. Deferred tax assets and liabilitiesmust be measured at the tax rates expected to apply to theperiod when the asset is realized or the liability is settled, also using the tax rates and laws that were enacted, orsubstantively enacted, by the end of thereporting period.



IFRIC23 Uncertainty over Income Tax Treatments requires an entity to consider whether it is probable that a taxation authority willaccept an uncertain tax treatment. If the entity concludesthat the position is not probable of being accepted, the effectof the uncertainty needs to be reflected in the entity’s accountingfor income taxes. Substantively enacted or not In some jurisdictions, announcements of tax rates (andtax laws) by the government have the substantiveeffect of actual enactment. In such circumstances, taxassets and liabilities are measured using the announced taxrate. However, this is not always the case and an entity would need to consider when the tax concessions (e.g., reduced taxrates) become substantively enacted in theirjurisdiction, for example, by considering the legislativeprocess and consensus in its jurisdiction for when a law becomes substantivelyenacted.



Conditionsattached to tax relief Some governments might structuretheir tax relief so it applies only to entities whohave been impacted by the coronavirus outbreak based on certain qualifyingcriteria, for example, only entities in certain sectors, or entities of a certain size (e.g., by revenue), or that have suffereda certain amount of economic impact. This may give riseto uncertainty and the need for entities to make judgements andestimates when assessing their income tax position, for example,whether for that taxation period, the entity will fall below the revenue threshold in order to receive the tax concession.Entities will need to determine whether it isprobable that the taxation authority will accept their position. If not, IFRIC 23 requires entities to assess whether torecognize any additional liability foruncertain tax positions. The same requirement applies to recognition of uncertain tax assets.



Taxrelief may come in the form of tax credits. Tax credits are not defined within IFRS, and entities need to exercise judgement indetermining how the receipt of a tax credit should beaccounted for, as a reduction in tax liability underIAS 12, or the receipt of a government grant under IAS 20, when it is structured as a cash payment or has other indicators ofa grant such as non-tax related conditions being attachedto it (for example, cash spend on approved research anddevelopment related activities). A tax credit to be treated in accordancewith IAS 12 will have indicators such as reducing income taxes payable(being forfeited or deferred if there are insufficient taxes payable) and having few, if any, non-tax conditions attached to it. Atax credit to be treated in accordance withIAS 20 will often be directly settled in cash in the case of insufficienttaxes payable and have non-tax conditions attached. In any case, all facts and circumstances relating to the specific reliefneed to be considered in assessing thesubstance of the arrangement.



Currentand deferred tax balances

Manygovernments announced tax stimulus packages in early 2020. This wouldnot impactthe measurement of current tax balances and deferred tax balances asat 31 December 2019. Some tax concessions such as tax rate reductions could relate to prior years. Because IAS 12 states thatthese balances are to be measured in accordance with therates and laws that had already been substantively enactedas at reporting date, any impacts relating to prior taxationyears would only be recorded in the financial period in which the amendinglegislation was substantively enacted.


Entities withreporting periods ended or ending in 2020 need to consider if thetax concessions announced in early 2020 are substantively enacted prior to reporting period end. As noted earlier, entities needto consider what is generally understood as‘substantively enacted’ in their own jurisdiction. If determinedto be substantively enacted by reporting date, then current tax balancesand deferred tax balances would be measured based on the tax incentivesincluding reduced tax rates under the stimulus package. Incases where the tax concessions are staggered over several years, such as incremental tax rate reductions, the expected timing ofthe reversal of deferred tax balances willalso need to be assessed.


Carryforward of tax losses

In assessing theprobability of the future realization of carry forward tax losses, entities will need to consider whether the adverseeconomic conditions arising as a result of thecoronavirus outbreak existed as at reporting date. If so, the entitywill need to consider the deterioration of the economic outlook in its forecasts of taxable profits and reversals of taxabletemporary differences. If not, the event isnon-adjusting, but the entity should consider disclosure around

the nature of thesubsequent event.



Inaddition to subsequent event disclosures, the following will also be relevant for entities impacted by the coronavirus outbreak: anexplanation of changes in the applicable tax rate comparedto the prior period; the amount and expiry date of any carryforward tax losses; and the nature of evidence supporting therecognition of deferred tax assets when the entity has suffered a loss in the current period. The entity should also considerdisclosure of the nature of any significantjudgements or estimates made when determining the appropriateaccounting for the matters described above. Such judgements mayinclude whether the tax laws were substantively enacted as of reporting date, and the determination of the accounting for incometax credits.


How we see it

Entitiesneed to determine whether changes to tax rates and laws as part ofgovernment responses to the coronavirus outbreak, were substantively enacted as of the reporting date. The characteristics ofany tax relief or rebates received by the governmentneed to be carefully assessed in order to determine whetherthey should be accounted for as a reduction to the incometax expense, or the receipt of a government grant. Uncertainties relatingto income taxes arising from these new government measures will requireentities to consider whether they should recognize and measure currentand/or deferred tax assets or liabilities at a different amount.



Revenue recognition

Thecoronavirus outbreak could affect revenue estimates in ongoing customer contracts in the scope of IFRS 15 Revenue fromContracts with Customers. This is because when acontract with a customer includes variable consideration (e.g.,discounts, refunds, price concessions, performance bonuses and penalties),an entity is generally required to estimate, at contract inception, the amount of consideration to which it will be entitled inexchange for transferring promised goods orservices. The amount of variable consideration an entity caninclude in the transaction price is constrained to the amount for which it is highly probable that a significant reversal ofcumulative revenue recognised will not occur when theuncertainties related to the variability are resolved. Anentity that makes such an estimate is also required to update the estimate throughout the term of the contract to depict conditionsthat exist at each

reportingdate. This will involve updating the estimate of variable consideration (including any amounts that are constrained) to reflect anentity’s revised expectations about the amount ofconsideration to which it expects to be entitled, consideringuncertainties that are resolved or new information about uncertaintiesrelated to the coronavirus outbreak. Estimation of variable

considerationand the constraint may require entities to exercise significant judgementand make additional disclosures. For example, an entity is required to disclose information about the methods, inputs andassumptions used for estimating variable considerationand assessing whether an estimate of variable considerationis constrained. Entities should also consider the requirements to disclosethe judgements and changes in judgements that significantly affect the

determinationof the amount and timing of revenue.


Uncertaintiesrelated to the coronavirus outbreak could also prompt entities tomodify contracts with customers or reassess whether it is probable that the entity will collect the consideration to which it isentitled. If both parties to a contract agreeto amend the scope or price (or both) of a contract, an entityshould account for the modification under the contract modification requirements in paragraphs 18-21 of IFRS 15. Significantjudgement is required to determine when an expectedpartial payment indicates that: (1) there is an impliedprice concession to be accounted for as variable consideration; (2) there is an impairment loss (see section 3 on Individual andcollective assessment of loans, receivablesand contract assets); or (3) the arrangement lacks sufficient substanceto be considered a contract under the standard.


Inaddition to the effect on ongoing contracts, entities will need to consider how the uncertainties with the coronavirus outbreak affectfuture contracts with customers. This could requirecareful consideration of, for example, collectability, priceconcessions and stand-alone selling prices. Entities may also needto consider how evolutions in their customary business practices affect

theirassessments under the revenue model. This could, for example, have an effect on an entity’s determination that a validcontract exists, its identification of performanceobligations and its assessment of whether it has a right to paymentfor performance completed to date.


Howwe see it

Entitiesmay need to use significant judgement to determine the effect of uncertaintiesrelated to the coronavirus outbreak on its revenue accounting, e.g.,estimates of variable consideration (including the constraint) and provide appropriate disclosures. Importantly, theeffects are unlikely to be limited to variableconsideration. Decisions made in response to the outbreak(e.g., modifying contracts, transacting with customers during collectabilityconcerns, revising pricing) may also have an effect on the accountingand disclosures for ongoing and future contracts.


Latest News