Financial statement and business continuity in times of Coronavirus

The impact of the crisis on companies' financial statements

But be careful to quantify the possible damage too soon

Chief financial officer, chief executive officer, directors, statutory auditors and external auditors, in the process of preparing the draft of the financial statements as at 31 December 2019, are now considering the information related to the effects of the Coronavirus on their companies.

The complex economic landscape and the foreseeable effects on financial markets and production activities produced by the serious crisis caused by Covid-19 acquires particular importance in the process of drawing up the next financial statements. Also, it requires all those involved in the various roles and bodies (members of the administrative and control bodies and CFOs) to carefully reflect on the information to be provided in these documents as a whole.

In particular, the expectations of users of financial information (e.g. analysts, investors, journalists) regarding the ability of the future financial statements to represent in a clear, complete and transparent manner the various risks that companies face today and the uncertainties that they may face in carrying out their activities are important. It’s crucial to bear in mind that today the spotlight is definitely on the impact of the Coronavirus on our businesses.

It therefore essential, in this complex situation, while being aware that we do not yet have a sufficiently clear picture of the economic and financial effects that this pandemic will have, draw the attention of the members of the control bodies and top managers  to ensure adequate information over the potential impact of the crisis on the company's economic and financial situation is represented, illustrating the remedies already implemented and to be implemented and the other operational and strategic decisions to be taken in order to deal in the best possible way with an economic and financial crisis that will be difficult to avoid.

The Italian regulatory authorities, such as Consob, Bank of Italy, Ivass (insurance market surveillance body), had already intervened in the past sub-prime crisis, to reiterate that the regulations on financial statements and the provisions contained in the accounting standards were already adequate for an effective response to the needs of information of the market. Compliance with the applicable accounting standards relating to financial reporting in the presence of significant risk is therefore essential.

One aspect, perhaps a priority for all those involved, is to assess how much the current situation affects the principle of a going concern.

It is my opinion and that of many CFOs part of the Andaf (the Italian Association of Financial Executive) , that it is quite premature, in the general scenario, to reach an assessment of a lack of the going concern assumption, and taking hasty decisions, because it will be necessary to understand, in the coming weeks and perhaps in the coming months, what will be the actual impact of this disastrous pandemic situation in each company, and thus understand what constraints, direct and indirect, will arise in their financial situation, in the supply chain and in their business.

Among the positive uncertainties, it will be necessary to understand the positive effects of the measures that will come from the decisions of the Italian government, which to date has already allocated the not inconsiderable amount of 50 billion EUR.

However, this does not detract from the importance of providing initial information both in the directors' report and in the explanatory notes to the financial statement, as required by current laws and the relevant accounting standards.

Paragraph 1 no. 22-quater of Article 2427 of the Italian Civil Code provides that the Notes to the Financial Statements must include information concerning "the nature and effect on the financial statement, financial and economic situation of significant events occurring after the end of the financial year".

Accounting standard OIC 29 shows how:

  • significant events should be considered facts that are of such importance that their non-disclosure could compromise the ability of the recipients of the corporate information to make correct assessments and take appropriate decisions.
  • when illustrating the fact that has occurred, an estimate of the effect on the company's financial statement/financial position must be provided, or the reasons why the effect cannot be determined.
  • the deadline by which the event must be verified to take it into account is generally the date of preparation of the draft financial statements by the administrators.

Additionally, as required by Article 2428 of the Italian Civil Code, the financial statements must be accompanied by a report from the directors that takes into account, among other things, the main risks and uncertainties to which the company is exposed, as well as the outlook for future operations. This issue is also particularly important with respect to the specific responsibilities of the CFO.

In substance, the “going concern” concept drawn from the Italian  accounting standards are also perfectly aligned for companies that prepare their financial statements in accordance with IFRS.

It is therefore clear that the extraordinary situation that has arisen in almost all countries in the world, is significatively important in the preparation of the 2019 financial statements, since the “preparers” must immediately carry out an initial assessment of the seriousness that the epidemiological emergency of COVID-19 will have on the company's economic and financial performance.

The observation should consider a horizon of 12 months, starting from the time the annual financial report is submitted to the shareholders

OIC 29 identifies the following types of subsequent events:

  • subsequent events that may affect the company's going concern;
  • subsequent events that must be reflected in the financial statements as they highlight conditions already existing at the financial statement date;
  • subsequent events that must not be included in the financial statements because they indicate situations that arose after the financial statement date but which, however, if significant, must be explained in the notes to the financial statements; in this sense, the vast majority of cases certainly include the health emergency arising from the COVID-19, which emerged in Italy towards the end of February 2020.

In the circumstances of "subsequent events" which, while not involving changes in the carrying amounts, concern extraordinary situations, such as a natural catastrophe, it is however required

correct disclosure in the financial statements. The information must include a complete analysis of the possible and probable economic effects, even if not quantifiable.

In the circumstances of "subsequent events" which while not involving changes in the book values, concern extraordinary situations, such as a natural catastrophe, it is however required a correct disclosure in the annual report. The disclosure must include a complete analysis of the possible and probable economic effects, even if not quantifiable.

The assessment of the impact on the financial situation appears to be more critical for companies that already had a financial situation almost at its limits. It should be recalled that, hence, a company is presumed has lost the assumption of going concern when it is unable to meet its obligations and commitments during its business. This means that the liquidity resulting from current operations, together with the funds available (in cash, at the bank, through credit lines) must be sufficient to repay debts and meet commitments due.

Particular attention should also be paid to the Board of Director’s Report. Specifically, in the section "Business outlook", appropriate comments on the performance in the first months of the year should be reported, which should be more detailed in the case of companies that decide to avail themselves of the possibility given by the law "Cura Italia", decree allowing the approval of the financial statements for a longer period of 180 days. In this sense, it might "tactically" be appropriate to consider whether the 120-day deadline should be respected and not resort to the derogation, so as not to face the complexity of a much more extensive disclaimer in June.

The document " Board of Director’s Report", prepared by CNDCEC (Italian Chartered Accountant Counsel) and Confindustria, published in June 2018, requires, in fact, in the presence of elements of doubt about the company's continuity, to evaluate and motivate, with objective elements (such as initiatives already implemented and under study by our Government), the possibilities of a restoration of economic and financial balance or the operations to be carried out in response to the crisis. In this sense it is also necessary to consider the possibility of using the lay-off fund, the possibility of renegotiating contracts and agreements, bearing in mind that for many contracts that are binding for companies, the current situation justifies specific actions, for example, such as layoffs for staff, suspension of mortgage payments or even the termination of the contracts themselves.

As anticipated, it is therefore untimely, at least for the companies whose administrative bodies will draw up the draft financial statements by the current month of March, to come to the conclusion, even considering the serious current situation, that the assumption of going concern has been lost.. While on the qualitative assessment of the effects recorded in the companies caused by Covid-19 the directors will have to be clear and exhaustive, the measurement and quantitative representation of the effects of the current situation on the accounts for the first few months of 2020 or even the intention to propose the liquidation of the company or to cease operating activities, should be assessed with particular attention. For many companies, in fact, more time will be needed to quantitatively measure the "damage" caused by this extraordinary situation, which is essential to complete all the necessary analyses and assessments.


Paolo Bertoli, Partner - RSM Società di Revisione e Organizzazione Aziendale