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The Irish Accounting & Tax Summit
Session 1 - Financial Reporting Under COVID-19 – Post Balance Sheet Events & Consideration of Impairment
Session 1 - Presentation
This transcript was created using AI and may contain some mistakes.
I kick off welcome everyone to the first session as part of this year’s accounting, Irish, accounting, and tax almost. Um, COVID-19 still stay the witness and the country facing the song soar sort of, uh, I’ve locked down. Irish SMEs and accounts are facing extraordinarily, uh, historically challenges and on present level, many of which we’ve never experienced before,
without mind on me, probably we’ve taken the ocean accounting, uh, Irish accounting and tax woman virtual. And we’ve always believed in the higher, the higher value of CPD and the TPD is far more than just a tick box exercise. We believe that your CPD should be invaluable support in helping you provide even greater value to your clients. On this. Year’s Arusha counting 60 and individual PBT session spread across four weeks and completely attacks attacks on a tactical truck.
And they’re still there for April. So on this morning session, I’m joined with my colleague Mike and like a hundred. And I we’re going to discussing M flash reporting under COVID-19 with a focus on database, basically on post balance sheet events and in payment of assets, I think two big ticket items. And in terms of, in terms, in terms of COVID-19 and this morning session is going to last from 11 to 12,
hopefully we’ll have you out by then. And as well as with all as with all our, our online sessions, downloads material is available. I think Jonathan’s going to put up the links and in the, in the chat box, I hope for the, uh, for the, for the download. So please go off and get the downloads in terms of questions.
And please do ask questions during the session and it makes it makes it, it makes it a lot more interesting for ourselves as, as, as presenters. And so in terms of asking questions down there at the, at the, at the chalk box, if you want to send your question directly to me, it’s what’s column owns and I’d pick it up and I feed it,
I’d feed it off into, into Mike, and we’ll see that we can, we can, we can, um, we can best your question. We’re really over to Mike now. Um, Mike, so we’re covering recovered two big ticket items. And in terms, in terms of COVID-19 as financial reporting, obviously there’s a myriad of issues that we could have covered.
I think you’ve picked two bigger, bigger items that basically people are kind of struggling with, which is both budget events, and I’ll do them and, you know, impairments. Yeah. And Pat, thanks very much for the, for the introduction column. Uh, I’m going to just start off here just by sharing my screen. So hopefully everyone can can see that now.
So, um, yeah, just, I suppose, just to, just to follow on from, from what you said, there are column that, like they’re, they’re, they’re, they’re really the two big ticket items, maybe along a going concern. Um, but I mean, postpone and cheese events and impairments, they’re probably the two big ticket items as a,
as a result of covert. And certainly in our day to day dealings, uh, in, in the practice of our team, we certainly feel that a lot of questions in this area over the past couple of months. So I suppose the book, the purpose of today’s session is just to give a bit of guidance on how to address the, the,
the issues that COVID-19 has presented in accordance with, uh, with FRS water or to the downloads. You mentioned downloads, call them up and, um, and they, they will be available in a link, but just to kind of go through what we have in our pack today. So we have, we obviously have our slides. Um, we have supporting documentation along with the slides.
So for example, we have a set of COVID-19 financial statements, which that just includes example disclosures that can be used, uh, when, when, when addressing COVID-19 with couple of extracts from our guidance from our first one or two.com. So section two deals with the whole issue of fair value in, um, fair value in property when there’s no act of Marcus,
section 11 and section 2017 with impairment of, uh, all financial instruments and assets and section 32 deals with, um, deals of the pool Spanish sheet events. And we also have an extract of some example, poor Spanish events, disclosures in financial statements. I suppose the one apology I’d make an advance of baskets. That’s the, there’s a huge vacuum and information.
That’s going into the CEO role at the moment, and there’s very little available to the public. So a lot of the exams that I have, they’re bigger companies that are playing are your friends, but at the same time that the two standards are comparable from a, from a pool’s balance sheet of end point of view, so that the treatment should be relatively.
I think, I don’t think, I think the concepts still, still hold still hold and mentor in terms of like, I use that where, where we’re, where we’re seeing file file reviews from, from, from, from our work, I think, um, you know, postbox use events and, and, you know, the distinction between just the analogy which we’ll go through is becoming a parent.
And I’d say the issues the, the firms are having and I think are, are becoming parents. Absolutely. Yeah. And like, it’s the same, it’s effectively the same rules under, under IAS 10 as you would have under FRS one or two. So don’t be put off by the fact that it’s a difference. It’s a different framework. It’s the same,
the same principle has been applied, but when we go through those as, as we, as we progress. And so as you say, the title of today’s session is financial reporting under COVID-19 or Spanish heat events and consideration of impairments. So I suppose we’d start maybe just by having a bit of a recap on course balance sheet events. Um, it’s a section towards the two of our first one or two,
assuming we’re, we’re playing it for us one or two. Um, and the, and the, the key issue that we need to decide from the start is, well, do we have an adjusting event or an uninteresting event? And typically, you know, usually that’s, that’s quite obvious, you know, I mean, the typical examples, the textbook examples we see are maybe a fire in a factory after the year ends at a debt or going out of,
uh, things like that. But, you know, with COVID-19,<inaudible> some of the, some of the issues aren’t necessarily as clear cut as they might have been previously. So we, we get to those in the next couple of slides, uh, events, they include all events up to the date of signing the financial statements. So, you know,
we don’t, we have, if we, if our year end is December, we sign off on the 25th of May, we need to consider all events right up to the data signing. It’s not, you know, the, you know, if there’s interim financial information or anything like that, that that’s a relevant, we need to consider right up to the date of signing and events.
Uh, our post Spanish use of answer to find in efforts one or two, as those events favorable and unfavorable that occurred between the end of the financial reporting period, and the days when the financial statements are authorized and ratio. Uh, so these are kind of the textbook examples that we usually get off of adjusting events. So the settlement of a court case that confirms the entity has an obligation at the year end.
So that’s an example of an event that under normal circumstances, we would adjust for bankruptcy of a customer after the year ends, usually confirms that a loss existed at the balance sheet date. And I’ve highlighted that word usually because under COVID-19, you could very easily have a situation whereby you had a debtor that was trading profitably trading, where that year ends, and,
you know, the issue occurred after the year end, you know, assuming that they were trading profitability before the year end. So we’ll get to that as we go through the next couple of slides sale of inventory after the year end, which indicates that they are worth less than they’re carrying value. So again, that’s, you know, we, we,
we had stock of a hundred grand. We were only able to get 80 grand office. That’s an indication that there was, uh, an adjusting event at the year end, typically a detailed profit sharing bonuses if the entity has a legal or constructive obligation at the year end. So again, that’s where you might have a company that declared that’s has, is trading profitably,
because we don’t know the, we don’t know the profits right at the year end. The profit sharing bonus is only determined once we can subpoena all the information. Another one is discovery of fraud or error that show the financial statements are incorrect. And you also, so just because we discovered that error after the year end, it doesn’t make it an uninteresting event.
It means that it’s an adjusting event, because like, with all of these, the key issue is, uh, did the event arise before or after the year ends? And if you ask yourself that question, hopefully you’ll get to get to the right answer. So examples of non adjusting events, and hopefully there should be an obvious difference between this slide,
these set of points in the previous set of points. Uh, so it’s a client and the market value of investments between the end of the year and the days when the financial statements were signs, obviously that’s relation to activity that happened after the year ends. If we had land that was sold subject to planning where canning was granted after the year ends, obviously the key event,
there is the planning being granted. It’s not necessarily that the initial sale, a favorable court case where judgements was granted after the year end dividend declaration after the year end. So we, we only recognize the evidence when we’re, when there’s an obligation to pay them when the different defendant is declared a subsidiary disposal after the year end, that the textbook example that you often see in exams,
destruction by fire or flood after the year ends or changes in foreign exchange rates or tax rates after the year end. So they are all examples of, uh, of non adjusting events. And hopefully when you look at the two sex examples, there, there should be a kind of a, a clear distinction as to what’s adjusting and what’s not adjusting. And I suppose when we look at score of 19,
then it’s, uh, it, there’s probably no textbook answer for, for, uh, for a global pandemic. Um, and that’s created a, you know, a lot of issues from a post balance sheet event, point of view, what’s, you know, all we can do is we can look at the standards and look at how we apply it to us.
And there’s also some FRC guidance out there that we get to sharply that we can use to, to, to, um, apply to it as well. And again, the key thing that we need to look at from a COVID-19 point of view is, is the event adjusting or is it not adjusting? And I think it’s quite evident. That’s taught you one December 19 year ends.
That’s not going to be adjusting a tip because the FRC have kind of come out and give them guidance on that. And they’ve been fairly, they’ve been fairly strong. I don’t think column we’ve had much from my asset, but certainly the FRC have kind of, they’ve issued guidance on that. I think, am I correct in saying like, there’s, there’s a general consensus out there now dust dust for December,
for December 19 year ends. And again, you know, obviously all of the carrier caveats apply and that COVID-19 is a, is that a non adjusting advantage required to disclosure? Yeah, exactly. Yeah. And, uh, so that that’s December 19 and then as we, that’s pretty clear, of course, and then as we go into The gray or then I,
I just, I just move along. Yeah. So, and I think by the time you get to March, it’s kind of, you know, COVID-19 taken holes, the country was in lockdown, you know, if there’s enough conditions there to say, okay, well, any events from there on is an adjusting event. And I suppose that the little bit of the gray area is maybe January and February.
And, you know, we’re probably not going to promote with that with a clear cut answer here, but at the same time, I think the key thing is that we need to use judgment and we need to, we need to actually look at the event after the year ends as being okay, well, a definite window, the business, or a property was impaired.
You know, what, where are the COVID-19, it was the COVID-19 issue presence at that period of time. Um, here are some key dates that hopefully will drive our decision making process in that. Uh, so, um, I’m not going to go through all of these, you know, the month of December 1st, couple of cases were identified in,
in blue hand in China, 31 December, uh, world health organization was notified the month of January. There was a couple of cases identified in Europe. And I think the first case was in the UK on the 31st of January, 2020. And then the month of February, it kind of became widespread across Europe to the point that we had our first case in Ireland on the 28th of Saturday,
the 29th of February, it was a leap year 29 to February with the first case in Ireland. So what criteria do we need to look at to see whether it’s COVID-19 and adjusting or an adjusting event? Some people might argue, okay, well, it was present in the world in December, you know, surely that’s enough to say that it’s, that it’s an adjusting event from December.
And I think the FRC guidance on this has been that it’s not necessarily the fact that the virus was present is that the significant amount of human to human transmission occurred after the year ends. Cause I don’t, I assume there’s various strains of different viruses that appear from time to time. But the difference between this one is that there was such a significant amount of human to human transmission.
Um, I suppose certainly December year ends, it’s not adjusting March year ends. I would say certainly adjusting, I think possibly February year ends might be the cutoff point for Irish companies because probably the 29th of February, we had a case in Ireland. Would you also need to look at other factors such as let’s say, if you had a January year end, did you have a debt that was maybe based in China that went out of business in that situation?
That might be an argument to say that that’s an adjusting event because it was a debtor in a country where the virus was, you know, it’s taking hold at that period of time. Well, I think, I think Mike you’re right. Like I think I like about on them, if it’s a case by case basis, like those, those am those clients who have copies of heart,
bam, you know, and exposure to other European markets. They may be looking at this differently if there’s, if there’s supply chain issues again, they might be looking at this slightly differently than just, uh, a cogni just solely based and operating in, in Ireland, say, and the UK and maybe certain, certain parts of, uh, uh,
of you’re aware, but 19 hadn’t taken told or tale until until tomorrow. Yeah, absolutely. And I suppose that the bottom line here is there’s probably no clear cut answer and all we can use here is professional judgment, which, you know, there’s nothing wrong with professional judgment, but we just need to, we just need to, you know, make sure we consider it fully.
And if we’re doing an audit of certainly to make sure that we document how we’ve arrived at, I was going to say that I was going to come back to my favorite topic, you know, uh, you know, documentation, documentation, documentation, as long as you’re, as long as your, as your, as your, as the, as your theory and your thought processes is,
is on fire. And his document is, you know, that, you know, on, on, it’s not a wet beauty off the, off the scale, We should be fine. Absolutely. Yeah. This is just the FRC guidance. It’s kind of useful because it’s a, it’s the one maybe piece of guidance from a regulator that’s a, well,
certainly that I’m aware of that that have kind of made a public comment on us and without even going into it, they’re basically saying that the general consensus that December 31, December 19 year ends for the vast majority of UK companies would be manage hosting events. So obviously because that’s coming from the FRC that’s that carries a bit of a bit of weight. So even if we look at a very simple case study here,
we’re looking X limiters prepares financial statements to 31 December 19 X limits, which has customers in the hospitality sector, including customer a, who owns a hotel in March of 2020 customer eight permanently goes out of business as a result of the restrictions placed on it from COVID-19 and the debt of 10 grand will not be recovered. So the question here is, does an adjusting event occur in the financial statements for the December 19 a year end?
I think base based on what we’ve looked at there and based on the FRC guidance, the answer is no that it’s not an adjusting event. Um, you know, at December 31st to December 19 coronavirus, I don’t think it made its way into Europe. It was contained, uh, contained within Asia and, uh, going on the FRC guidance. It’s quite obvious.
That’s not, that’s not an adjusting event, but then if we apply the same circumstances to January 20, 20, February, 2020 of March, 2020 year ends, it’s not as clear cause, um, January 20, 20, you’re probably you’re the argument. There would probably be that it’s not an adjusting event February 20, 21st case arrived in Ireland. And there are certain years and arguments that you would recognize that as an adjusting event at that point,
March, 2020, obviously it’s a, that that’s whether that’s past the, it’s already a pre year end pre year end impairment. Anyway, anyway, March 20, 20 year ends, I don’t think there’s any argument to be made at that point. And the final question I just ask is what if the customer means out of business in January, 2020, what are the December year end implications?
If they went out of business in January, 2020, they probably didn’t go out of business as a result of coronavirus. They probably went out of business just as a result of your standards, you know, customer was struggling and, um, the customer struggling and, um, you know, we, we just look at the entrepreneur and the circumstances, and that’s usually indicative of a conditions that existed at the year end peak because coronavirus is out of the equation.
I think in that example, I see a previous come up there just above the downloads. So we might get Jonathan just to put a link into the, into the download box again, if you’re having trouble downloading them. I think a common issue is that if you’re using internet Explorer, sometimes that doesn’t work. So if you use Chrome or one of those,
I think that’s, I think that’s usually works. That’s a common issue that we guess with, with the download sometimes. Um, so again, this is kind of going back onto your point. There are column, uh, documentation of post balance sheet events to support the disclosures that is key. Given the changeable nature of the pandemic. It’s very important to consider both Spanish heat events rate ops with the data,
say enough at 20, 20, 19 year ends are likely not to be adjusting events 2020 you’re required higher degree of judgment, certainly in those first couple of months of 2020, if you have a January 20, 20 year end or a February 20, 20 year end. So what are the disclosure requirements? If it’s a non adjusting event we’re not required to adjust any figures in the financial statements.
So we just kind of continuous as normal. The nature of the event eventually be disclosed and an estimate of the financial effect or a statement that such an estimate cannot be made. Just notice here that there’s a policy choice. We can either go with an estimate of the financial effect or a statement that’s such that that’s such an estimate cannot be made. Um,
the seconds, the second of those two options is preferable. And I think I’ve seen DACC coming out recently just seeing best, uh, you know, providing a range of estimates of the financial effect is more preferable than it. So this, this, this one is it’s, it’s better. Um, providing a range of estimates of the financial effect is better than a statement that’s,
that’s such an estimate cannot be made was I think when we get to one of our examples, financial statements, such as KLM, um, they’ve obviously gone to the statement that such an estimate cannot be made purely because they just, there were so many variables that it, that it was nearly impossible for me to do that for an adjusting event. We’re required to adjust the amounts recognized in the financial statements,
including the relation to the soldiers. So we don’t necessarily deal with that. The disclosure requirements under section 32 of efforts, one or two, but we looked at the individual sections that drive you that drove the, uh, disclosure. So for example, if we’re recognizing an impairment where we look at the impairment requirements under section 27 of efforts one or two,
so I think it’s something along the lines of, you know, we just the amount and payers and the reasons for the impairments, what we looked at, the individual standard driving, the opinion paramount has, of course the section 32. These are a couple of examples. Um, again, I can read these in your own time. I have a few better examples in the,
in the financial statements within the pack, they’re there to, to read it in your own time. Um, this, this one here it’s worth going into, just because it’s, this one gives an example of, um, of the estimated effects. I think this was kind of a precious metal company or, or something like that. And they basically said,
that’s, you know, um, 31, December, 2019, it was a non-interesting event. However, as after the 21st of March, 2020, the effect was that we didn’t have 0.4% reduction in the net asset value of our portfolio. It was probably a lot easier for those types of companies because there’s an active, you know, trading Marcus and then prices can easily be established and just to close off and pull Spanish events.
If we look at FRS one or five and ask, well, what’s different. And I suppose we need to look at it from two angles. The first angle is the measurement and recognition of Paul’s balance sheet events. There’s actually very little difference between that first one Oh five and efforts one too, you know, so we’re, we’re still, we still need to consider adjusting events.
We still need to consider non-interesting events. We need to look at going concern if we decide after the year ends that the financial statements, um, you know, the going concern basis is inappropriate. Then we use the break off basis. Um, we need to look at adjusting events, non adjusting events and so on and so forth. So if you actually sat down with<inaudible> in one hand and efforts,
one or two open, and the other hand, it would be very little difference until you get to the disclosure section. And that that’s where the big difference is under FRS one Oh five. There’s no disclosure required of non-interesting events. So some people say that’s, you know, there’s no impact on their first one Oh five financial statements threats he has from a measurement and recognition point of view,
but just to disclosures, aren’t required because it’s obviously average used or reduced to close your framework. Uh, so that’s, that’s post balance sheet events covered off. Um, so the next session, the next section to move on to is the whole area of impairment. And we look at section 27 of that first one or two for this, uh, section 27.
It covers impairment of any countries and impairment of assets other than inventory. So just be aware of that. If we’re looking at, if we have stock, we need to look at that section as opposed to the, the Norman impairment section. Uh, so what’s required under, under section 27 of FRS, one or two, we assess at each reporting date,
whether infantry is, are impaired, and we do this by comparing the carrying amount with its selling price, less customer case. And we will get to that. We’ll get to those in the next couple of slides. So impairment of assets, uh, other than inventories. So we carry out an impairment review when impairment indicators exist. So if, um,
if we go to section 27.9 of FRS, one or two, there’s a list of what are, what are the internal indicators and the external indicators of impairment and a fairly significant list there with the two that probably will catch up nearly every company, meaning that pretty much every company would have some kind of an impairment indicator, significant changes with an adverse effect on the entity of taking place during the period,
or will take place in the near future, in the technological of America’s economic or legal environment in which the entity operates. So, you know, every company is going to be, it’s going to have some kind of an impairment indicator, and then it would be just about weather. When we look at the assets, do we need to impair the assets or not?
Um, certainly that’s an area. That’s a lot of company, a lot of companies would have avoided in previous years. Certainly even things kind of have, you know, when things have been going quite well, it’s been very easy to kind of take a step back and say, well, if there’s no one parent indicators, therefore we don’t need to carry out an impairment review with COVID-19.
I think it’s very hard to argue that there’s, that, that certainly that first indicator isn’t present at the second COVID-19 you can see, you can see the effect, it’s hard tread the general Director of general economy. So to, to ignore us, to ignore us in your consideration and you know, it wouldn’t be, wouldn’t be, wouldn’t be smart as to say,
like, it, it does, it is, it is given it’s, it’s an indicator, you know, it’s a it’s, you know, as, as what you said. Yeah, absolutely. And, uh, I think, um, certainly in, in, in, in our, both of our previous roles as reviewers call them, we would have seen quite a bit,
you know, you’re looking at the, at the fixed assets section of the file, you know, are there any impairment indicators? The answer usually is no, no further work requires certainly for reviewers over the next 12 to 18 months. I figured that would be the one key area focus. Like what have you done to, to address the pyramids? Have you carried out in the pyramids review?
Um, and, uh, if I, if I was a reviewer that’s, that’s certainly an area that I I’d probably be targeting on visits, I suppose it’s worthwhile to, just to go into the pack here for a second. I think it’s on page 89 does just, uh, that’s just one example, just to break up the slides to look at this,
I’m sorry. Wrong. So it’s page, it’s page 89 at the bottom of the page here. Um, So Just to give an example of stock impairment under COVID-19. So company a has inventory of, of wine and chapters at about a hundred grand at the year, end of March, uh, 2020, uh, following the development of COVID-19, the company’s market has diminished significantly.
The company has, has identified that they can sell the wine and chocolates as Easter hampers to avoid them going out two days, the sales price of the hampers would be 80,000 and there is an additional cost of 20,000 just associated with packaging. Then the directors are satisfied, but this is an adjusting event. So in this example, with our carrying value of a hundred thousands,
we sales price of 80,000 there’s cost to compete with 20 thousands, meaning that our sales price less custom due to 60,000. And therefore we need to recognize the stock impairment of 40 thousands in the March, 2020 accounts. And again, the reason for that is that that’s an adjusting event, a March, March 20, 20 year end. If you had a December year end,
you wouldn’t adjust for it, but you disclose it in the North, your accounts. And then if you’re, if you’ve got a December year end, you’d still need to consider, consider impairments. And because obviously it’s, it’s, it’s, it’s, it’s, it’s, uh, it’s up to the UpToDate of signing the financial statements. So you’re saying by look,
there are conditions that may be wanted impairment. So we we’ve done our impairment review, however, it’s, it, it, it isn’t affecting the balances at the year end. Yeah. And, you know, it’s so we can get a certainly from an auditor’s point of view, it’ll be, so you can get an estimate of the effect. And there also may be going concern implications with that,
that you need to consider. So even though we are satisfied to manage hosting event, is the impairment so significant that there’s question marks off of the going concern basis. So it covers off on a couple of angles. So these are a normal impairment indicators. So it’s a trend in the market value of an assets, uh, significant adverse changes. That’s that’s the one that we spoke on the last night market interest rates have increased during the periods of carrying them out of net.
Net assets is more than the estimated fair value of the entity as a whole evidence of obsolescence, significant changes with an adverse effect on the, on the entities of hands to restructure make. I need to let this continue in operation and a reassessment of an asset from infamous to finite. So there are just a couple of impairments indicators. And all of that means that if you have any of these circumstances,
presence at your year end, or during your year end, that you need to carry out an impairment review. So what does an impairment review entail? We need to look at the carrying amount versus the recovery of the amount. So the carrying amount that, that, that’s obviously a very, you know, quite a straightforward figure. It’s effectively what we’re carrying as Ash on the balance sheet.
So if our stock’s worth a hundred grand and we’re carrying that, or if a fair stock is a hundred grand in the balance sheets, that’s our carrying amount. So there’s no issues. There are recoverable amount then takes a little bit of work in establishing. So that’s the higher of fair value, less cost to sell and value in use. So like overall from those,
and then on the next couple of slides, but this, uh, this chart is quite useful just in deciding whether where to go with impairments. So the example I would have said to you call them, you know, over the last couple of years, that’s where a lot, a lot of files would have gone. So were there indicators of impairment presence?
The answer is no, no further work requires happy days. Then however, if we do have an indicator of impairment presence, well, then we need to look at the carrying value and we need to look the recoverable amount. So recoverable amount, unfair violence cost to sell, or the higher off fair value, less cost to sell and value in use.
If our carrying value is higher than a recoverable amount, then we have an impairment loss. We charge that to the profit and loss, um, subject to, if the asset was previously revalued upwards, we’d hit the revaluation reserve first, and then the balance going to the P and L if the carrying value is less than the recovery of the mounts, then we’d know no impairments.
So, you know, no issues that maybe we just move on. Um, when we look at fair value, less costs to sell, we look at sales as an arms length, a sales and an arms then basis between knowledgeable, knowledgeable and willing parties in an act of Marcus though, w the, the, the, the there’s an obvious issue at the moment in the sense that,
um, you know, we, we currently don’t have an active market. Well, there’s certainly a reduction in activity in the markets. So there’ll be a big question Mark, as to whether there’s an active market at the moment. So what is an act of America’s an American in which all of the following conditions exist? The Asians, the streets in America,
they’re homogenous. So they’re there at the same types of assets. So I don’t know if we’re selling a four bed house in, in Dublin four or whatever, so that the assets, you know, the, those comparable assets that are, that are being traded as willing buyers and sellers, et cetera, can be found at any time. Again, that’s,
that’s probably no at the moment and prices are available to the complex. So I haven’t seen any, any data from economists or anything like that in the last couple of last couple of months. So I would say on the basis that B and C are no at the moment, we don’t have an active market. Uh, so what do we do if there’s no active markets?
And again, this applies both to a consideration of impairment, but also if we’re, if we’re carrying assets like investment property at fair value, you know, we, we, we, we need to calculate fair value for those two circumstances. So we look to, we look to section two of FRS one or two, and within the appendix of that,
there’s kind of a hierarchy of rules to apply when there’s no active Americas. So the best, the best case scenario is that we have a quarter price for an identical assets in an act of Americas. So, and again, that’s my example of, you know, four bed house, the enact Americas, you know, they’re, they’re pretty much identical assets,
so we can, we can compare that. Uh, obviously we don’t have that. We don’t have that at the moment because the market isn’t active the next week, we look as well, do we have any binding sales agreement or recent transactions for an identical assets? We probably do have, you know, recent transactions. However, this may not be a good estimate of fair value if there’s been a significant change in economic circumstances since then,
since the recent transactions. So anything on the property price register at the moment, but I have looked at it in awhile, but I’m guessing most of the data there is it’s pre COVID. Um, so I would say there’s probably not us. There’s not many recent transactions since the significant change in economic circumstance. So the next best value is if you use evaluation technique.
So that might be your, your, your auctioneer or whoever uses using their own valuation technique. And that’s, that’s fine once it’s, um, once it’s reliably reflects how the market could be expected to price the asset and the inputs to the valuation technique, re reasonably represent market expectations and measures the risk return factors inherent in the assets. Probably question max over whether you can rely on valuation techniques at the moment.
I think, uh, I’ve seen a few in recent weeks and the range, the range of value has been provided. Evaluations is quite large at the moment, but I think also, I think also a lot of, a lot of evaluations they’re like, they’re it, it’s, it’s heavily caveat in terms of, you know, a very, you know,
significant uncertainties relating to COVID-19 are coming through on those valuations. So they’re almost covering themselves as well by saying here’s evaluation Bush, you know, so your point there is valid in terms of what can you rely on that next? Yeah, absolutely. So if we just rely on that, well then if after all the steps, the outcome of the range of reasonable fair values is significant and the proper disabilities can be reliably assessed,
then we can’t use fair value. And then what do we do then? Well, if that’s the case, the carrying amount of the assets on the tape, your asset was last reliably measured, it becomes this new cost and the asset is carrying cost less impairment. How do we look at impairment? Well, because we can’t use fair value and let me just because they can’t use fair value,
we have to look at value and use. So again, we get to value and use now in a moment. So just be aware too, that, um, this example of no active market is probably only relevant in a very short window. So if we’re looking at a December 19 year end, that’s fine. There’s no, there there’s a, you know,
there was a fully active market in December, January, February, maybe, you know, then once Matt came along, there was no active Americas. So if we’re doing accounts for a year ended, you know, February, March onwards, and we’re signing those off quite soon after the year end, when we’ve no slice of what the active market looks like,
you know, that’s when this comes into play. But if let’s say in a few months time, we have full sight on, you know, what the values of properties were or this property, this property is no longer relevant. So it would kind of cover it very shortly into end time, but it’s just worth pointing out what we do if we don’t have an active marketers in place.
I think like if you scroll back up to that diagram, I think in terms of like, that’s a brilliant diagram about the flash report and considerations, most of the, with my other hat on coming from a, from a, from an audit perspective, this is also brilliant because it tells you where you need to document your, your, your, your justifications on your considerations and your thought process.
So, you know, that’s where, that’s where it all hangs on in terms of, okay, well, I just want, you said, well, okay, we’re going down to County and value. We’re going to recover amount, fair value. Well, then you go your step by step process to get to our value in use of why we count your,
why we use it. So it’s, it’s again, it’s doc it’s evidence on file and document of buying. Again, it still comes back to the point you made the short window in where you can use this or use the value in use, but you need to document your telepresence, just gone from a to Z without going through all the, the rest of the,
uh, the, the rest of the letters isn’t gonna stock up. Yeah, absolutely. And even something like that on an audit file would say it would, would be very useful. Um, I’m just going to move on to value and use. Um, so, uh, so, so what is value in use? So it’s the present value of future cash flows expected to be derived for it from an asset.
And we calculate that, do it using the following steps. We estimate the future cash inflows and outflows to be derived from the continuing use of the assets and from its ultimate disposal and the playing inappropriate discount race to those future cash flows. Um, anyone who’s a member of the arc will, might be familiar with this. Um, this is kind of a rough template of a value in use calculation.
I’m not going to spend too long, or I’m just using it to show you because it’s effectively just numbers on the page until you put your own, but until you apply it to a company, but just to let you know that that’s there. So any, any arc members that are here today, that’s, that’s within the area. So it’s, it’s quite a useful,
a useful starting point for using value and use calculations. Um, so what should estimates of cashflow includes? And again, I, I don’t think we have enough time to go through, but I just want to point you to page 86 under on the handout. There’s a good example, showing what can, and can’t go into a value and use calculation,
so that that’s, that’s quite a useful example there. So that’s on page three, page 86 off the pack. Again, I want to get onto the example of financial statements, so I don’t have time to go through it, but just to, just to point you in the direction of that. So what should estimates of cashflow includes? So it shouldn’t be projection of cash inflows from,
from continuing to use the assets, projections for cash outflows that are necessary to generate the cash inflows and can be attributed to the assets and the net cash outflow is expected on the disposal of the assets of the terminal value. Um, key thing here is that we should be using the most recent, recent budgets, our projections, and they should be realistic.
So, you know, if let’s say, if we, if we had a couple of good years and we know COVID-19 has going to his was bad, well, the budgets that we’re using within our value and use calculations, they should take into, into account COVID-19, uh, we should be extrapolating the budgets using a steady or declining growth rate in subsequent years.
So if we go back to, if we go back to our example here, we have a, an annual growth rate of 5%. And then you’ll see, I think in year five, we’d gone down to 2.2, 5% of that obviously reflects the risk as the years go by. And that’s where the that’s within section 27 of efforts, one or two,
that the rules that you apply, you win when doing value and use calculations, they are set out in section 27, similar to the impairment column. I would say value and use calculations will be stress tested. Luckily reviewers in the, in the coming months and years. Yeah, I think I’ve, I’ve, I’ve come across a few, a few of them in my time on dam.
Yeah. Like it’s, it’s, it’s, it all looks really good.<inaudible> looks daddy, but then like, you’re that’s I do see it. It’s just, it is just a calculation. So it’s, what’s underlying that it’s, it’s how, it’s how you have auditor’s verticalness or evaluated or, or the reasonableness of the impulse. Now I’ve gotten into it.
I think that could possibly be, and then documenting that it’s documented that consideration on the file is, you know, it’s, what’s vitally important. And I think too, when you have a company that has that’s loss making, it’s going to be very hard to, you know, for ’em to make the value in use calculation work. Like if you a loss making company you’re,
you’re possibly looking down the route of impairments, you know, they necessarily the fair value, less cost to sell. Uh, doesn’t doesn’t exceed the carrying amount. What should value and use calculations include? So we estimate the future cash flows to be derived from the assets, uh, our expectations about the possible variations in the amount or tiny of those cashflows.
We need to include the time value of money. So that’s what I just highlighted there, the price for bearing the uncertainty inherent in the asset. So that’s the reduction in the time value of money or over the years. And other factors such as the illiquidity that affects the pricing of future cash flows. So we can’t include, we should, must include,
uh, cash in flows from financing activities, so interest, et cetera, it should be all pre tax and we can’t use income tax or anything like that. Um, we can’t, and this is probably a big one here. We, we can use cash flows arising from future restructuring to which an entity is not yet committed. So let’s say we’re planning on,
it’s a factory, we’re planning a lesson, 10 staff go, and we’re going to get a machine in that can do the job. If we haven’t communicated the fact that we’re letting 10 people go well, you know, we can’t, we can’t factor that into our calculations cause that’s only speculative at that point. There’s a, there’s a question coming in here,
but a situation where a client decides just to hold an investment property for capital appreciation and doesn’t rent it out. And how can you calculate the value in use if there’s no cash flows expected? Uh, well, first of all, if we, if we were to go back to, Mmm, If we’re looking at an investment property, we’re looking at carrying that at fair value.
So our carrier is going to be our fair value. Um, we probably need a little bit more on the situation was we’d be looking at an active America’s we’d be looking at, is there similar properties for sale in the area? You’d probably be in trouble if, um, if it was that situation that I presented, that it was a merit to year end and we were signing off shortly after the year end in that it will be very difficult to determine what fit,
what fair value is in that. If we can’t determine what fair value is, we need to look at value and use. And if it’s not generating any value, the form of the property probably doesn’t show any, any significant value. So it’s, for reasons like that, that a lot, a lot of auditors did not sign accounts or that certainly a lot of counts we’re headed up for a good period of time,
but I would be holding off, uh, to see, you know, can we get, can we get details of the fair value, um, when an active market resumed, if that, if that’s possible. Yeah. Mmm. So w we also can’t include any cash flows arising from improving or enhancing performance. So again, if we say, well,
we’re going to spend a million Euro in two years time, and the factory is going to work a lot more efficiently. We can factor that in because, um, you know, that again, that’s speculative at the moment. Another concept within the value and use calculation is as a cash generation unit. So if we look at our fixed asset register and let’s say we have a hotel,
and we have like, you know, 500 assets on the fixed asset register, middle of the building, the hotel, the furnishings, the, the tables, chairs, and so on and so forth. Uh, if we have an asset like that, we look at the cash generation unit and not necessarily the individual assets. So we look at the hotel as a whole,
and that, and that’s what our cash generating unit is. So just, just be aware of that, some assets to generates value in themselves, and some assets need to be grouped together to, to, to generate the value such as such as a hotel, Um, just to briefly discuss, um, basic financial instruments. So that’s section 11. So the principles are quite similar to section 27.
So we assess each year for objective, uh, basic financial instruments, or what would be covered here would be things like our debtors group loans, things like that. Uh, we assess it each year for objective evidence of impairment and our impairment indicators. You know, they’re, they’re, they’re are other similar team to section 27. So financial difficulty of the obliger or issuer reach of contracts,
or did our debt or default, or was her late payments, economic difficulties causing better settlement terms offered to the creditor, the debtor in liquidation, obviously that that’s a huge issue. Uh, another factor such as economic adverse effects. So if we have an impairment indicator, we need to carry out an impairment review. And, uh, if, if we,
if we have an impairment, we, uh, we write the debtor down to the present value of expected future cash flows. And there’s, there’s an example within the pack within section section 11 of, uh, if you look at the table of contents, um, section 11, there’s an example there. Um, so then the section 14, which is an inventory as we’ve already discussed,
uh, we’ve already discussed that at the start of impairments, so I’m not sure, are there any questions that are calling them? I think I missed, um, there’s a question to come up here and do we need to disclose the estimated amount of an impairment in a non adjusting event? Yeah, so that’s, so that would go, that would go back to your point,
basically, if, if, if, if you’ve considered, obviously COVID-19 and, uh, it’s a, it’s a, it’s a, it’s a knowledge adjusting event it’s, uh, regarding disclosures to the, the, the disclosure requirements are the nature of the event of his COVID-19 and a bit more detail on that. And then as you put there an estimate,
an estimate of the effects or a statement that such an, uh, an estimate can be provided. So in the, in the point of if, so, if there’s a PA, if it does an impairment post year end, that would be the, obviously it wouldn’t relate. It wouldn’t relate to our year end. It would then just require disclosure.
Yeah. And it would fall In under this. So we actually have a choice on the reference one or two, we can give an estimate or a statement that’s such an estimate cannot be made. And what’s coming from the regulators is that the first part of that choice is far preferable. That if you can, if you are able to estimate the effect that we should be providing an estimate of the financial effect,
they’ll bear in mind when Quinn called the 19 broke, it was very easy to argue that a statement of the effect cannot be made because, you know, no one knew when the lot’s going to be lifted, nor knew what the effect would be an ask prices, et cetera, et cetera, as things go on, it would probably be more, it would probably get easier to estimate the financial effects.
So, I mean, we have a choice if we can estimate that’s what we should have been disclosing or alternatively, a statement that’s such an estimate cannot be, it cannot be hazed. Well, hopefully that’s answered that question. Uh, I’m just gonna go, I think it’s, um, I think it’s page 95 or inner they’re they’re about from the pack and then the example financial statements.
And so, um, what we’re going to just demonstrate now is what does an adjusting event look like in a set of financial statements versus what does non adjusting event look like? So it would start with the non adjusting event. And what we have here is the KLM accounts. So the Royal Dutch airlines, um, these were signs, I think in maybe mid April or maybe early April or something along those lines.
Uh, it’s a December 19 year end, which again, applying our, applying our logic that we spoke about area means that it’s a non adjusting event. And you’ll see that when we have non adjusting events, it’s typically wrapped up into one note in the notes to the financial statements. So what a lot of KLM saying, so the worldwide spreading of COVID-19 and the first quarter of 2020 has had,
and continues to have a major impact on air traffic around the world. Many countries have taken extreme, increasingly stringent measures in attempt to store the expansion rate of the epidemic. Some countries have impose conditions on the movement of travelers from the Netherlands, or more broadly from Europe, consequently air travel air traffic to most of Karen’s destinations will be significantly reduced for a period of time to some 20 to 10% of normal traffic levels.
That’s an insane reduction in, in, in air traffic levels. Um, Kaylin’s financial performance for at least 2020 will be affected severely by a loss of revenue, sales, sales of tickets and significance net negative cash flows to an extent, and for a duration that are currently uncertain. Now, bear in mind, these were signed on, on, uh,
in April, 2020 at the date of this annual reports. The crisis is still evolving, bringing many uncertainties, which makes it impossible to predict the scale of impact of the COVID-19 crisis on KLM and its future, including our operations, et cetera. So, I mean, you’ll see an obviously that’s not the only case to call the 19 has mentioned in their accounts,
but that’s where the main disclosure related to COVID-19 has occurred so far. That’s kind of an example of the December 19 year end, where it’s an adjusting event. I came across, I came across the BT, um, accounts last week. Let me just open them up here. They’re on, I think roughly page 95 of the pack. So obviously BT worked with they’re the telecoms provider in the UK.
So, um, so, uh, the key thing here is that this is a March 20, 20 year end. So, uh, obviously applying our criteria, it’s no longer an adjusting event, it’s an adjusting event. So what you’ll see in the BT accounts is instead of having the one big disclosure knows they’ve looked at the assets individually and they’ve included commentary.
Um, no, again, I’m only going to be scratching the surface of what’s in these accounts today that they’re, they’re useful ones to download, and I forgot to use deserts. Disclaimer, when we, when we show third party accounts, um, we show these purely for educational purposes. It’s not, you know, we’re not, we’re not critical of anything in the accounts that they’re purely for,
for educational purposes. Um, so if we look at BT, um, well, what has the effect of COVID-19 been on this company, um, for 31 March year end, which was signed on the 6th of May. So we have a period of, uh, literally just a month, I suppose, recognize a loss of 95 million as a result of COVID-19.
So it’s probably in the context of a company worth 4 billion. That’s probably not the hugest, not the biggest of losses, but still a significant loss as well as a result of the pandemic. And then if we go down, I’ve highlighted bits of this that are worth reading, but just to go through the main bits, these are the principle risks and uncertainties,
which, you know, they’re useful. Cause it just kind of sets out that the issues, uh, in relation to the company, you’ll also see that within the financial statements, they’ve, uh, they’ve used this kind of virus emoji, if anyone can see it, does it in a nice little touch. So anytime there’s a mention of coronavirus or a little virus virus,
and what would you think on this? Um, so if we go to the, the 90 for the breakdown at the 95 million, so during the year we recognize one off charges and make you 5 million relation to the impact of COVID-19 on various various balance sheet items as our 31, March, 2020, this comprises an 88 million increase in our expected credit loss provision for receivables.
So if we were looking at this on reference one or two, it would be section 11 of their first one or two, that, that the impairment would come under from customers and contract assets and 7 million contracts loss as well. So again, that’s, that’s ultimately the effects that COVID-19 has had on BT in the month, since the, since the year end.
Then when we, when we get into intangible assets, um, we look at an asset of 8 million of Goodwill and there’s, I think there’s about three pages explaining what they’ve done and Goodwill and talk about the cash generation units. And they talk about value and use calculations, the budgets that they’ve taken in, et cetera, et cetera. Uh, so after three pages we have has,
COVID-19 had a material impact on, on, on Goodwill, uh, COVID-19 is not considered to have a significant impact on the assessment of impairment. Its impact on the group is considered to be short term and it’s not anticipated to have a significant impact on determined on the, on the terminal year, which is the key driver for our value and use type of patients.
It’d be, it’d be interesting to see that the workings behind it, and it would be interesting to see what happens in the next year when, when to see if the budgets match up. Cause we can only assume that the work was, the work was done to support the, the, the Goodwill basis was yeah, that’s that’s uh, if you have a read of that in your own time,
it’s about three pages just saying what they’ve done to assess the impairment of Goodwill. Um, the final one that I’m just going to talk about here is his program rights. Uh, so obviously, um, part of Beatty’s remit is they secure broadcasting rights for premier league games, champions, league games, et cetera. And at the year end, they have,
uh, they have 310 million in, um, program rights. So that’s not just on the right hand side of the screen there. So that’s 310 million represents amounts that they have paid to the premier league as at the 31st marriage for games that they were yet to show us that they, they, they pay them on the open. Then the amortize that as,
as, as the games get shown, um, I suppose if you were looking at sky sports balance sheet, that would probably be, that would probably be a drop in the ocean. Um, but just, just as regards to the work that they’ve done, just to see where it is that 310 million impaired are not 310 million of program rights recognized in the balance sheet as that 31 marriage 2020 relate to sporting events,
postponed as a result of COVID-19. These are not considered to be impaired at the balance sheet date as sporting governing bodies. For example, the premier league and the wafer are still determining how or if to complete the current season, whether and how the seasons are completed, could have an impact on whether there is any impairment. The majority of program rights assets affected by COVID-19 related to domestic and European football leagues,
which are being amortized over 12 months from August, and which will be fully amortized by July, 2020, if any impairment is recognized in future periods, we would also see compensation and risk in respect of rights, which, which have not been fulfilled until this is established any potential recoveries would represent contingent assets, which taught me the criteria. But, um, I suppose just given that the,
the days that we’re in, if you’re wondering why we’re here on the 16th of June and from tomorrow, there’s going to be a hundred premier league games played over the course of whatever five or six weeks that area circuits probably carry. It carries a lot of waste. So I mean, if you’re looking at BT here, you’ve got 300 million that they’ve effectively paid to the premier league.
Um, if that’s not, if the games aren’t paid well, but then retain the money from the premier league, the premier league, obviously you have to retain the money from the clubs. And, you know, if you consider that, that figures property, billions, when you’re taking into account the likes of sky sports, et cetera. And obviously there’s a deck of cards that if,
if, um, if that money had to be retained by all the providers, there’s obviously a knock on effects to Paul and Paul burn, more salads. We’re just not, and all the work on all those other values. So it’s just, I suppose it’s an interesting one poster. That’s how, that’s, how they’ve addressed it in that they’ve said,
okay, we have an asset here. However, if the games are canceled, we will also see compensation in respect to the rights that haven’t been fulfilled. You’d like that like, like they’ve record, obviously, like they’ve recognized, they’ve recognized COVID-19 as a, as a, as a, as an in, as an impairment indicator. If we go back to,
you know, did the theory of it. So if they recognize COVID-19 as in existence, it’s an impairment impairment indicator. So we’ve done our impairment review and based on an impairment rule, our conclusions of commanders. So just ignore COVID-19 will look to it, doesn’t, it doesn’t affect it is wrong. So it is what they told us. It seems to see the kind of Stockholm and then their conclusions,
you know, they, they disclose their conclusions. Yeah, absolutely. So it’s a very good, it’s a very good example. We’re probably only scratching the surface of what’s in the accounts. What said it’ll be interesting to see what other accounts surface over the next few months, particularly 20, 20 year ends. Cause we we’ve, we’ve had a good few,
a good few examples of 2019 year ends, but if you’re just interested in to see what kind of a knock on effect is, has, uh, I’m not going to go through them cause we’re right up on 12 o’clock, but just to highlight, there’s another set of accounts they’re called Brill. Um, there are another good sex, just a it’s a December 19 year end.
It’s a 300 year old company and it’s just that good to disclosures. They’re just showing how they’ve, uh, you know, the, the problems that they face. They’ve got a lot of intangible assets on their balance sheets. And just to, just to kind of illustrate the effect that COVID-19 is going to have on those, so that they’re worth reading and in your own time,
I’m not sure call them if we have any. I think, I think there’s just a query there about the, the XL spreadsheet that you showed on onscreen. We’ve got the volume of use that’s available on the arc, isn’t it? It is. Yeah. And I’m not sure if this breakout room is closing after or if it stayed open, but if,
if Jonathan or someone can put a link or someone can put a link into that, we will put that we put a link to that in it, but it is often the arc. And I think it’s in the other resources section is where you’ll find that. So I think that brings us right up to 12 o’clock. So, uh, I suppose look just to thank everyone for attending and hope,
hope it was beneficial. I think the next session is as 1220 and it’s Amanda, Amanda calming, Amanda common is doing the tax session. So I think I see me holiday or so I think he’s<inaudible> thanks guys.