Effects of the coronavirus crisis on accounting according to the provisions of the german commercial code (HGB Rechnungslegung)
The coronavirus pandemic has turned into a crisis of historic proportions. Companies have to deal not only with the effects of the pandemic on their operations, but also on their annual financial statements as at 31 December 2019 as well as their 2019 management report. In a recent statement issued at the beginning of March 2020, the Institute of Auditors in Germany e.V. (Institut der Wirtschaftsprüfer in Deutschland e.V. – IDW) has commented on the effects of the coronavirus on accounting.
VALUE-ADJUSTING VS. VALUE-JUSTIFYING EVENTS
The IDW is particularly concerned with the question of whether the causes of the spread of the virus and the resulting economic consequences are to be qualified as a value-adjusting or value-justifying event.
Since the erratic spread of the infection started only in January 2020, the IDW is of the opinion that the appearance of the coronavirus as a worldwide danger will be a value-justifying event in the new year. According to the IDW, consequences for the balance sheet will therefore only be taken into account in financial statements after 31 December 2019. If and when there could be an exception to this rule and whether the coronavirus could be classified as a value-adjusting event must be assessed on a case-by-case basis in accordance with general accounting rules.
INFORMATION TO BE INCLUDED IN THE NOTES ON THE ACCOUNTS AND IN THE MANAGEMENT REPORT
In many cases, however, the coronavirus crisis will have an impact on the risk and/or forecast reporting in the (group) management report and possibly also on the report on events after the balance sheet date in the (group) notes.
According to the IDW, a reporting obligation in the risk report exists in principle if the possible further developments could lead to negative deviations from forecasts or targets of the company, if it is a significant individual risk and otherwise no accurate picture of the risk situation of the company is conveyed. In particular, risks directly jeopardising the existence of the company must be reported.
In deviation from the German Accounting Standard DRS 20, the IDW refers to the exemption under DRS 20.133 where, among other things, only a comparative forecast (i.e. only the trend without the intensity) or the presentation of various future scenarios, stating the corresponding assumptions, may be required. A complete waiver of forecast reporting is, however, not permitted.
Reporting parties must decide whether the coronavirus is an “event of special significance” for the economic situation of the company and whether it must be disclosed, in accordance with the statutory regulations, in the report on events after the balance sheet date in the (group) management report. In this regard, the IDW states that an event of special significance generally exists if its effects are likely to influence the picture of the company’s position conveyed by the financial statements as of the balance sheet date and if, without the supplementary reporting, the development after the balance sheet date would be assessed significantly differently by the users of the financial statements.
THREAT TO THE CONTINUATION OF THE COMPANY’S BUSINESS ACTIVITY
In a worst case scenario, the economic consequences of the coronavirus crisis could have such a significant negative impact on the business activities of the company or group that the accounting principle of continuing operations (going concern premise) can no longer be upheld. In the event that the legal representatives come to the conclusion that the continuation of the company’s business activities is prevented by factual or legal circumstances in accordance with § 252 (1) No. 2 German Commercial Code (Handelsgesetzbuch HGB), it is mandatory that the liquidation values are already evaluated in the annual financial statements as of 31 December 2019. This applies if the crisis is possibly triggered by the coronavirus, regardless of whether this is classified as a value-justifying event or a value-adjusting event.
To ensure a correct accounting treatment already in the annual financial statements and the management report for the year 2019 a prudential assessment will be required. Your personal contact persons at FIDES will be happy to assist you with any further questions, requests or suggestions you might have.