It has already been more than a year since we registered the first case of the coronavirus in our country, and many companies have been affected by government decrees and other restrictions. Companies are currently completing or preparing to compile their financial statements. Although the accounting rules have not changed in any way, companies should pay increased attention to some areas when compiling it. The aim of this article is to speak in greater detail about some of these areas.

Going concern assumption

When compiling the financial statement, companies must always assess, if the going concern assumption is fulfilled. It is defined as the ability of the company to continue in its activity for the 12 months following balance sheet date at minimum. Under normal circumstances, the assessment is usually not so complicated, but in the current situation, there may be facts that pose a threat to the assumption. These factors generally include:

• closed business premises, prohibition of activity,
• an abrupt decrease in the number of orders,
• limited means of production (material, labour, subcontracting, goods),
• excessive debt,
• secondary insolvency,
• incidents, natural disasters, ecological catastrophes,
• political situation, unrest, wars.

It is obvious that many of these factors became a reality in 2020 and it is therefore necessary to pay due attention to evaluating the going concern assumption.

In case the management of the company concludes that the going concern assumption is disrupted or endangered, the company must adjust the methods used for compiling the financial statement accordingly and it must also inform its users about it adequately in the notes to the financial statement.

Fixed assets

Property is the most significant part of assets for many companies. At the same time, property is bought for a long period of time and companies usually expect to use it fully. Restriction of operation may cause a devaluation of previously acquired assets. For compiling the financial statement, it is therefore necessary to assess, if the accounting (residual) value of the individual asset entries has not been lowered. We compare the accounting residual value to the so-called utility value, which is most frequently defined as the new expected cash flow the company will receive from using the asset. A provision is created in case its utility value detected during inventory taking is considerably lower than its value in the accounting (and this lowering of value cannot be considered final). A provision represents only a temporary lowering of the value of an asset. In connection with provisioning for non-current assets, companies need to also think about a corresponding adjustment of the depreciation plan.

Fixed assets are not only buildings, machines or cars, but they also include non-current financial assets. These entries also include ownership interests, the valuation of which may have been greatly impacted by the pandemic. In case the company valuates the given interests using equivalence, it proceeds in the same way as in the previous years. In case the company valuates interests at acquisition price, there may again be grounds for a provision and the same rules apply here (the necessity of verification) as for a provision for tangible/intangible assets. At the same time, it may happen that an interest valuated by using equivalence or a provision may suddenly have zero value and the company may thus register a significant decrease in its fixed assets as well as its total assets.

Inventory

When compiling a financial statement, companies should always evaluate, if the registered inventory (goods, products) is not overvalued. In practice this means comparing their valuation in the accounting to their expected sales prices lowered by costs related to sale. If the company finds out that the valuation in the accounting is higher, it should create provisions and thus reflect the expected loss in the costs. At the same time, the current situation may influence a change in the provisioning policy. Many companies create provisions for stock according to the criterion of the time without movement (i.e. according to the circulation of stock), but this criterion may not be sufficient at the present time. Provisions may be created for example also due to high stock-up, when the company is not certain that it will sell all stock. A situation may also occur, when a company will have to perform depreciation of stock to a higher extent – for example in the case of specialised stock or stock with limited durability, which it will no longer be able to sell.

Receivables

A receivable expresses entitlement to future cashflow and should therefore be recorded in the financial statement in the amount of the actually expected cashflow. In the accounting, receivables are generally valuated at nominal value lowered by a potential provision. At the present time, when the economic position of many companies has worsened, companies should pay due attention to the area of receivables. This does not only include assessment of provisioning as of balance sheet date and the sending of reminder notes for receivables past maturity. The company may lower the risk of occurrence of bad debts or irrecoverable debts by, for example, regularly verifying the economic situation of its customers, increasing prepayments for its supplies or by means of collaterals etc. As of balance sheet date, it is necessary to prepare an analysis of the expected payments of receivables and to identify those that involve a risk of being paid only partly or not being paid at all. Same as in the case of provisioning for stock, many companies also create provisions for receivables based on the time criterion, i.e. using a certain percentage depending on how long they have been past maturity. In the current situation, however, evaluation of the need for provisioning had better be individual according to the current creditworthiness of the individual customers, because even receivables only shortly past maturity or not past maturity at all may now more frequently be doubtful as well.

Reserves

Reserves are generally intended for covering payables or costs, the nature of which is known and which are probable or certain, as of balance sheet date, to incur, but their amount or the time they will incur are not certain. In connection with the pandemic, there are several reasons, which may give grounds to companies for creating reserves. These include for example the layoff of employees and creation of reserves for compensation, withdrawal from a contract and creation of reserve for contractual fine, disadvantageous contracts and creation of reserves for related losses or restructuring. A reserve, or the cost related to the creation of reserve, is always entered in the period, in which the decision was made or potential risk (cost) was identified. The amount of the reserve should be created according to the best estimate of costs, which will probably occur, or the amount that will be needed to settle an obligation.

State support and antivirus programmes

Some government support programme relating to the coronavirus are basically a subsidy (e.g. Antivirus – support of employment). For many companies this may be the first time a subsidy is entered in the accounting. That brings with it the need of assessing the situation correctly and capturing it in the accounting. Assessment needs to be made according to the current situation, of course. Nevertheless, for support programmes there is a process of approval and their provision is uncertain, because the request may be rejected. A subsidy should be only entered in the accounting at the time when its provision is beyond doubt, which, in the case of coronavirus support programmes, may in some cases only be at the time the given amount of money is received. There may thus be a disagreement between the time the subsidy is entered in the accounting and the time of the reason, for which it was provided (e.g. wages). When compiling a financial statement, it is therefore necessary to assess, if and in what way the support (subsidy) received will be reflected in the accounting of the accounting entity.

Approval and payment of profit sharing

Based on the compiled financial statement, the way of settling the achieved profit/loss is decided at the general meeting of the company, among other things. The decision about entitlement of partners/shareholders to profit sharing, among other things, is within the powers of a general meeting. The general meeting does not decide about the payment itself, though. This decision is within the competence of the statutory body, which is obliged to assess the economic situation of the company prior to payment, assessing especially if the payment will not cause bankruptcy of the company. It may therefore happen that although entitlement of partners to profit sharing is decided at the general meeting, the statutory body will decide not to pay this profit sharing or to only pay a part of it.

Conclusion

As has been said in the introduction, the accounting rules, and therefore the rules for compiling the financial statement, did not change with the coronavirus pandemic. The economic situation of many companies has changed significantly, though, and with it the risks that need to be assessed in relation to compiling the financial statement and reflected in the accounting. Companies must now pay individual attention to some areas of the financial statement, which they had previously considered routine. If you need advice during the process of compiling the financial statement, for example assessment of the adequacy of the chosen provisioning method or you are not certain about the evaluation and potential impact on the going concern assumption, please, do not hesitate to turn to us.