COVID-19: Other impacts on 2020 financial statements

In this editorial we will review 7 main impacts of COVID-19 on financial reporting.

The review of deferred taxes, the evaluation of the going concern assumption and exchange differences are some of the topics that should be given more attention.

Exchange differences

As a consequence of COVID-19, the Colombian peso has devaluated against other currencies, such as the US dollar, which has exceeded $3,500. This implies that entities that carry out transactions in foreign currency must recognize the effect of this devaluation in their monetary items, such as cash or financial instruments.

This, in turn, implies that entities that have accounts payable abroad with suppliers or banks must account for exchange difference expenses, which are not accepted for tax purposes until the transaction is carried out through the settlement of the liability.

2. Review of deferred taxes booked

At the end of each period, entities must evaluate and adjust their deferred taxes. When performing this process, at the end of the 2020 accounting period, entities that have recorded or will record deferred taxes for tax losses should be very careful.

This is because paragraph 29.21 of the SME Standard states that deferred tax can only be recognized when the entity is certain that it will generate profits in future periods against which it can offset its tax losses.

“In some cases it may be necessary for some entities to derecognize their deferred taxes for this concept or to refrain from accounting for them”.

Having that certainty can be difficult in these times of uncertainty, especially in the case of entities that because of COVID-19 have doubts as to whether or not they will be able to continue operating in the future. Therefore, in some cases it may be necessary for some entities to derecognize their deferred taxes for this item or to refrain from recording them.

The important thing is that the entity carries out an adequate tax and financial planning, which allows it to carry out these analyses. If you want to learn more about this topic, we invite you to access the webinar Effects of COVID-19 versus financial statements 2019 and 2020, where Juan Fernando Mejía, lecturer of International Standards and tax will address the key aspects that must be taken into account so that the financial information reflects the economic reality of companies, product of this pandemic.

3. Recalculate the budgets of the entities

“Budgets that were prepared prior to the pandemic will need to be adjusted to reflect new corporate action plans”.

Since the coronavirus pandemic is an unforeseeable event in the planning of any entity, it will be necessary for each entity to make an assessment of the new situation it faces, in order to design the strategies it will adopt to continue operating and generating revenues. In this regard, budgets that have been prepared prior to the pandemic will need to be adjusted to reflect the companies’ new action plans.

4. Assessment of the going concern scenario

The going concern assumption, according to paragraph 3.8 of the SME Standard, is an entity’s ability and intention to continue operations for at least one more period beyond the reporting date.

Entities should assess whether there is any indication that they may not be able to continue operating in the future as a result of COVID-19. In doing so, they should consider the plans they have designed to counteract the negative effects of the coronavirus, such as applying for bank loans or creating new lines of business.

The regulatory frameworks for full entities, SMEs and microenterprises have been designed for entities that meet the going concern assumption. If an entity ceases to comply with such hypothesis, it should abandon its regulatory framework and prepare its financial statements, applying the framework of Annex 5 of DUR 2420 of 2015.

5. Directors’ management reports

At the end of each fiscal year, the administrators must present to the shareholders’ meeting or board of directors a management report in which they present the evolution of the business, the situation of the company and the important events that occurred after the fiscal year.

In this regard, the entity’s management should adjust its management reports for the 2019 fiscal year and ensure that the report presented for the 2020 fiscal year reflects the impacts of COVID-19.

Statutory auditors should be vigilant to ensure that each entity complies with this requirement.

6. Audit risks and accounting estimates

Fiscal auditors should perform additional procedures regarding risk assessment and the evaluation of accounting estimates made by the entity. This is due to the fact that the spread of COVID-19 has created pressures on management, related to the need to present positive results in the financial statements, and this may lead them to prepare reports with inaccuracies.

7. Adjustments to accounting policies and estimates

Some entities may find it necessary to adjust their accounting policies and estimates to reflect their new economic reality. This may include changing measurement models from fair value to cost, or changes in depreciation methods, among other decisions.

Source: Update