Financial statements reflect a company’s overall financial performance and allow investors and creditors to evaluate conditions for investing or lending finances, respectively. Without a good financial report, companies may lose a huge stake in running their business. On the other hand, the current pandemic brought many challenges to businesses including the presentation of the impacts of COVID-19 in their financial statements. Analysis of financial statements is also crucial for accurate reporting of a company’s growth trajectory.
Read more on our article about Financial Analysis: A Vital Method for Business Growth
What are the accounting issues that arise regarding the presentation of the financial statements? How does the COVID-19 affect the disclosure and figures in the financial statements?
The specificity of income and expenses in financial statements
Business owners and managers can identify which income and expenses are directly related and attributable to COVID-19. To do so, they need to ascertain whether or not some expenses and revenues would have been incurred or earned during the pre-COVID-19 times. Moreover, such income statement items should not recur once the business enters into the post-COVID-19 era. In other words, businesses must identify income statement items that are specific to the COVID-19 pandemic.
Prolonged leaves, depreciation for suspended PPE, rent, and utilities during lockdowns are COVID-19 expenses that will continue post-COVID-19. Therefore, these items do not belong to incremental costs and are not directly attributable to COVID-19. Examples of the specific items attributable to COVID-19 may include:
- Infection prevention measures such as company-wide sanitation costs;
- Temporary changes in rent arrangements such as rent concessions from lessors;
- Hazard pay to employees during a lockdown.
Presentation of the impacts of COVID-19 in financial statements
Companies depend on their particular facts and situation when presenting the impact of the COVID-19 or other global factors in their Income Statement. The severity of how the wave hit them will determine that. Moreover, a company’s accounting department must also be able to reliably quantify the magnitude of their damage; from its effects on the workforce, the customers, vendors, and sales numbers.
More than revenue, accountants and business owners need to consider how COVID-19-related expenses must be presented in the income statement. If they decide that presenting these specific items is appropriate, they must classify them to which “group” they belong to. According to International Accounting Standards 1 (IAS 1), expenses are classified either:
- According to function (cost of sales, distribution, administration); or
- According to nature (depreciation, amortization, rent, salaries).
It might not be appropriate for an individual line item for COVID-19 related expense and income to be added to the income statement. The matter would rely on the materiality and pervasiveness of the item/s, as well as the classification. If the items also apply to different functions or natures, COVID-19 specific items must be grouped with the same classification. It might take a lot of professional judgment in this area as COVID-19 is indeed unprecedented, and not much has been written in the past and in the guidelines to find specific “instructions”.
Depending on how pervasive the impact of the pandemic, the company might also need to assess whether they will be presenting within the Income Statement the effects of COVID-19, or merely state it in the Financial Statements Notes as part of the related disclosures.
Points to take into consideration
- COVID-19 related items should fit into the current structure of the income statement, and not the other way around.
- It might be appropriate to present the items as “unusual” or “exceptional”, but not “extraordinary”, as specifically stated in IAS87.
- Today’s circumstances call for professional judgment, therefore, it is best to have a reliable team of experienced professionals to help you with governmental requirements, and your basic accounting needs.
It may be that the time of “post-COVID-19” never comes, that we are stuck in this era. However, we learn to swim in uncertain waters. Our knowledge and experience of dealing with the pandemic will pass along as time progresses. It is important to focus on how we can incorporate the effects of such a crisis into our daily routines, businesses, regulatory requirements, and life in general.
Income-generating activities may have changed. Some businesses may have lost a certain percentage of their expected revenue, while others have boomed. Consequently, the same is true for expenses. In dealing with these, business owners must always ensure that they have a reliable support from their staff, accountants, and government to fare through these trying times as minimally unscathed as possible.
S.J. Grand and Kwikdroid
S.J. Grand had been around since 2002. Our firm has emerged stronger having fared through global calamities such as the SARS crisis and the COVID-19 outbreak in China. S.J Grand’s certified accountants and financial consultants are fully trained to support your business and help give you back control and transparency over your operations.
Our continued growth also led us to the utilization of Kwikdroid, a multi-language and multi-currency accounting and management Cloud-based platform that is fully compliant with Chinese regulations. Your accountant will be with you for every step of the process, whenever you need them. Consulting with your accountant for an Income Statement presentation is more convenient when everything you need for discussion is in one secured database.
S.J. Grand’s tax and accountancy services provide advisory on China’s tax and business regulatory environment as well as assist in income tax preparation for foreign enterprises in China. Contact us to get you started.
If you want to know more about our latest Cloud-based company solution, go to our Kwikdroid page to check the prices and packages we offer, no matter the size or type of company.