IFRS/PFRS Insights

We all find ourselves in a period of unprecedented disruption due to the COVID-19 pandemic. In an effort to help companies manage the new challenges in today’s new normal, EY has prepared an updated IFRS publication titled Accounting considerations of the coronavirus outbreak. You may click the link to view or download the publication.


IFRS/PFRS Insight #1: Going concern

• The going concern assessment needs to be performed up to the date on which the financial statements are issued.

• Where relevant, management takes into consideration the existing and anticipated effects of the outbreak on the entity’s activities in its assessment of the appropriateness of the use of the going concern basis.

• Given the unpredictability of the potential impact of the outbreak, there may be material uncertainties that cast significant doubt on the entity’s ability to operate under the going-concern basis. If the entity, nevertheless, prepares the financial statements under the going-concern assumption, it is required to disclose these material uncertainties in the financial statements in order to make clear to readers that the going concern assumption used by management is subject to such material uncertainties.

IFRS/PFRS Insight #2: Financial instruments


• Current vulnerability due to concentration and liquidity risks – Entities that have identified concentrations of activities in areas or industries affected by the outbreak will have to disclose such concentration risks.

• Asset classification and business model assessment: impact of sales –
A deterioration of the credit quality of the borrower or the issuer of a financial asset, as a result of the coronavirus outbreak, may result in entities deciding to dispose of investments classified as hold-to-collect under IFRS/PFRS 9. If the sale is due to an increase in credit risk, this could still be consistent with the business model objective of hold-to-collect because the credit quality of financial assets is relevant to the entity’s ability to collect contractual cash flows.

• Contract modifications – In cases where entities may need to obtain additional financing, amend the terms of existing debt agreements or obtain waivers if they no longer satisfy debt covenants, they will need to consider the guidance provided in IFRS/PFRS 9 to determine whether any changes to existing contractual arrangements represent a substantial modification or potentially a contract extinguishment, which would have accounting implications in each case.

• Hedge accounting – If an entity has designated a transaction such as the purchase or sale of goods or the expected issuance of debt as a hedged forecasted transaction in a cash flow hedge, the entity will need to consider whether the transaction is still a ‘highly probable’ forecasted transaction.

• Expected credit loss (ECL) assessment – The deterioration in credit quality of loan portfolios/trade receivables, as a result of the outbreak, will have a significant impact on the ECL measurement. If payment terms are extended in light of the current economic circumstances, the terms and conditions of the extension will have to be assessed to determine their impacts on the ECL estimate as well as any other accounting impacts.

IAS/PAS 39 (applicable to insurance companies)

• Under IAS 39, all financial assets, except for those measured at fair value through profit or loss, are subject to review for impairment. Assessments should be made at the end of each reporting period as to whether there is any objective evidence that a financial asset or group of assets is impaired. Any impairment loss recognized on Available-for-Sale equity securities in an interim period cannot be reversed through profit or loss in a subsequent period.

IFRS/PFRS Insight #3: Asset impairment and Fair Value Measurement

Asset impairment
• As the crisis evolves, and the conditions are unpredictable at this stage, management is required to exercise significant judgement to assert reasonable assumptions which reflect the conditions existing at the reporting date for impairment testing. We expect that in the current situation, majority of these assumptions are subject to significant uncertainties. As such, entities should consider providing detailed disclosures on the assumptions and sensitivities.

Fair value measurement (FVM)
• IFRS/PFRS 13 provides relevant guidance on FVM of assets and liabilities in markets that have experienced significant volatilities or reduction in volume or activity, which are particularly relevant in this current environment. The application of this guidance to arrive at a reasonable estimate of FVM requires significant management judgement and hinges on the robustness of the entity’s FVM determination and review processes. In certain cases, the changes to the existing valuation techniques and valuation adjustments required in response to the current market conditions may warrant assistance from external valuation specialists who possess the necessary expertise, experience and market knowledge. Providing transparency over the techniques, key assumptions and inputs used in determining fair value, including the sensitivities, by providing disclosures required by IFRS/PFRS 13, is an integral part of FVM and is key to enhancing the usefulness of financial reporting in this unprecedented time.

IFRS/PFRS Insight #4: Government grants and Income taxes

Government grants
• Due to the severe impact on many entities’ business activities of the coronavirus outbreak, many countries’ governments, agents or similar bodies have introduced (or are expected to introduce) relevant measures to assist entities. However, not all of these measures are considered as government grants. Entities should evaluate the measures carefully and determine which standards should govern the respective accounting treatment.

Income taxes
• Recent government responses to the coronavirus outbreak have included income tax concessions and other rebates. Entities need to consider the impacts of these legislative changes on their accounting for income taxes.
The characteristics of any tax relief or rebates received from the government need to be carefully assessed in order to determine whether they should be accounted for as a reduction to the income tax expense, or the receipt of a government grant. Uncertainties relating to income taxes arising from these new government measures will require entities to consider whether they should recognize and measure current and/or deferred tax assets or liabilities at a different amount.

IFRS/PFRS Insight #5: Insurance recoveries and liabilities

Insurance recoveries
• The terms and conditions of an insurance policy are often complex. In the context of a potential insurance recovery, determining that there is a valid insurance policy for the incident and a claim will be settled by the insurer, may require evidence confirming that the insurer will be covering the claim. Once it is established that it is virtually certain that the entity will be compensated for at least some of the consequences of the coronavirus outbreak under a valid insurance policy, any uncertainty as to the amount receivable should be reflected in the measurement of the claim.

Liabilities from insurance contracts
• Entities issuing insurance contracts will need to assess the impact of the coronavirus outbreak, or the disruption caused by the outbreak, to their insurance liabilities based on their specific accounting policies, including the effect on the liability adequacy testing of the insurance liabilities.

IFRS/PFRS Insight #6: Leases and Onerous contracts

• IASB document on lease modifications – In April 2020, the IASB released a document, prepared for educational purposes, highlighting requirements within IFRS 16 Leases and other IFRS standards that are relevant for entities considering how to account for rent concessions granted as a result of the coronavirus outbreak. The document explains how an entity evaluates whether a rent concession constitutes a lease modification, which is defined under IFRS/PFRS 16 as a change in the scope of a lease or the consideration for a lease, that was not part of the original terms and conditions of the lease.

• Proposed amendment to IFRS 16 – On 24 April 2020, the IASB published an Exposure Draft, Covid-19-Related Rent Concessions (the ED) with a 14-day comment period. The ED proposes an amendment to IFRS 16 to permit lessees, as a practical expedient, not to assess whether particular coronavirus-related rent concessions are lease modifications. Instead, lessees that apply the practical expedient would account for those rent concessions as if they were not lease modifications. The ED proposes no change for lessors.

Onerous contract provisions
• If an entity has a contract that is onerous, IAS/PAS 37 requires the entity to recognize and measure the present obligation under the contract as a provision. In assessing the unavoidable costs of meeting the obligations under a contract at the reporting date, entities, especially those with non-standardized contract terms, need to carefully identify and quantify any compensation or penalties arising from failure to fulfil it.

IFRS/PFRS Insight #7: Other accounting considerations

Revenue recognition
• Entities may need to use significant judgement to determine the effect of uncertainties related to the coronavirus outbreak on its revenue accounting, e.g., estimates of variable consideration (including the constraint) and provide appropriate disclosures. Importantly, the effects are unlikely to be limited to variable consideration. Decisions made in response to the outbreak (e.g., modifying contracts, transacting with customers during collectability concerns, revising pricing) may also have an effect on the accounting and disclosures for ongoing and future contracts.

Events after the reporting period
• The distinction between an adjusting and non-adjusting event is based on whether the event provides evidence of conditions that existed at the end of the reporting period. Entities need to ensure effective processes are in place to identify and disclose material events after the reporting period which could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements.

Other financial statement disclosure requirements
• Entities need to consider the magnitude of the disruptions caused by the outbreak to their businesses and adequately disclose the information about those assets and liabilities that are subject to significant estimation uncertainty, in order to provide users with a better understanding of the financial impact.

Other accounting estimates
• Apart from the above, the following are some of the other key accounting estimates required to be made by management under IFRS/PFRS. These estimates generally include management’s assumptions about the future recoverability of an asset:

1. Net realizable value of inventories under IAS/PAS 2 Inventories
2. Impairment charge of investments in associates and joint ventures accounted for in accordance with the equity method under IAS/PAS 28 Investments in Associates and Joint Ventures
3. Remaining useful life and residual value of property, plant and equipment, intangible assets and right-of-use assets under IAS/PAS 16 Property, Plant and Equipment, IAS/PAS 38 Intangible Assets and IFRS/PFRS 16 Leases, respectively