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COVID-19xHealth
PwC Middle East 8 June 2020
COVID-19
Accounting for the uncertainty arising from COVID-19
Webcast
Mohamed ElBornoPartnerME Assurance Leader
Helen WisePartnerME Accounting Consulting Services Leader
Michelle AmjadDirectorME Accounting Consulting Services
Muhammad HassanPartnerAccounting Advisory
Romil RadiaPartnerME Valuations Leader
Joining you today
Accounting for the uncertainty arising from COVID-19 webcast - 8 June 2020PwC
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Our focus for today - accounting in uncertain times
Impairment of financial instruments for Corporates
Impairment of non financial assetsFair value measurement
Going concern assessment
Other considerationsInterim financial reporting disclosures
Q & A
1 2
5
01 Impairment of non-financial assetsFair value measurement
IAS 36: Indicators of impairment - COVID-19 specific
Annually unless indicators present Only indicators of impairment
PwC
Financial performance and cash flows below forecasts/prior periods
Material changes in mid-term and/or long-term growth rates
Market capitalisation less than book value of net assets
Changes in business model, restructuring, divestments, etc
Restrictions on operations - inability to import, export, or travel
Increase in the entity’s cost of capital
Changes in market interest rates or other market rates of return
Deferral of investment projects; and
Significant or prolonged decrease in the entity’s stock price [JVs/associates]
Fluctuations in the foreign exchange rates or commodity prices that impact the entity’s cash flows
COVID-19 indicators might include:
Goodwill / indefinite lived assets: Other non financial assets:
Accounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
IAS 36: Goodwill impairment testing - COVID-19 specific
PwC
● Impact on the performance of individual business units
● Any changes in management reporting levels?
● Is the original CGU allocation still appropriate?
● What if no indicators at CGU level?
● Expected reorganisation?
● Impact on goodwill reallocation.
● Impact on impairment testing
● Are CAPEX projects put on hold?
● First test assets before goodwill testing.
● Appropriate sequencing of assets is important.
● Impact of post balance sheet developments in COVID 19.
● Impact of COVID-19 on testing businesses acquired close to year end.
● Impact on prior period goodwill reallocation and impairment
● Are original fair values still relevant at BS date?
● Bargain purchase deals could cause p&l volatility.
● Common control acquisitions - is it appropriate to elect FV?
● Time lag b/w finalising purchase price and acquiring control
Cash generating units Sequencing of impairment
Group reorganisation Provisional PPA allocation
Accounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
Key value considerations
Reliability of underlying assumptions
Impact of market conditions on projections
Use of valuation experts and approaches
Given the current market uncertainty, there is a need to be careful and diligent when assessing financial reporting valuations (whether fair value or value-in-use) and the underlying assumptions.
It is important that sector, geographic or company-specific risks arising out of current conditions are appropriately reflected in any valuation analysis
Valuation implications of the effects of COVID-19PwC
Discount rates
Cash flows projections / forecasts
Consider multiple probability-weighted cash flows to derive value estimates
Other important considerations:
Extending forecasts before applying terminal value
Impact of a government subsidies to be assessed carefully
No double counting between changes to discount rate and cash flows when assessing different scenarios
Consider the impact of current events on earnings expectations
Valuation implications of the effects of COVID-19PwC
Demand/ supply and price changes
Contracts: renewals and renegotiations
Termination of leases, if any
Supply chain disruptions Workforce restructuring
Exchange rate changes Interest rate changes Fiscal and monetary policy changes
Debt covenants / refinancing
Liquidity issues, cash flow pressures
Understanding how current risks are reflected in the forecasts is critical and it is important that all underlying assumptions are reasonable and/or supportable. We recommend the following..
Base underlying assumptions on recent external data such as macroeconomic forecasts, market capitalisation, updated GDP forecasts, analyst presentations and broker analysis
Market situation
Real estate assets - key considerations
Valuation implications of COVID-19PwC
Source: Guidance – IVSC Dealing with valuation uncertainty at time of market unrest
● Residual valuations - projected timelines (e.g. construction, sales) may need to be revised.
● Leases – carefully consider rent freezes and other related adjustments.
● Some sectors have been particularly impacted – (e.g. hospitality - assumptions for ADR and occupancies).
Impact on real estate valuations2
● Current sentiment indicates negative impact on real estate values in most sectors.
● However, limited market evidence is available in many cases.
● Key assumptions must be market derived where possible (occupancy, yields, etc.) rather than speculative.
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● Note market uncertainty and update valuations regularly.
● Look for trends emerging in terms of the impact on rents, sales rates, occupancies, etc.
● Consider sensitivity analysis on key valuation assumptions to assess likely impacts.
Our advice3
02 Impairment of financialassets
IFRS 9 Expected credit losses for Corporates
Reasonable and supportable
Key areas to think about when calculating the ECL under IFRS 9
Use best data available - current, prior recessions, continuously update
Forward looking information
Significant judgement - unbiased range of possible outcomes probability weighted Using simplified approach : provision matrix
Disclosures on income statement, IFRS 7 and critical estimates and judgements
Intercompany loans
PwCAccounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
03 Going concern assessments
Going concern
● Cash flows and forecasts - consistent with impairment test
● Consider direct and indirect impacts
● Understand financing arrangements
● Debt covenants, repayment terms
● Debt modifications - impacts
Going concern - what to think about?
● Explain impact on COVID-19
● May still prepare IFRS financial statements but not going concern
● Considerations of normal IFRS requirements
Disclosures - not a going concern
● Explain impact on COVID-19
● Be specific
● Be complete
● Mitigating factors
Disclosures - going concern
1 2 3
Disclosures - not a going concern Disclosures - going concern
PwCAccounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
04 Interim financial statements
Interim financial statements
Disclosures on what has changed due to the impact of COVID-19
1 Disclosures on financial risk Significant changes or transactions
Fair value disclosures Disclosures on significant estimate and judgements Goodwill impairment
Going concern
2 3
4 5 6
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PwCAccounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
05 Otherconsiderations
(a) Revised lease payments are substantially the same as, or less than, the lease payments immediately preceding the change;
(b) Affects only payments originally due on or before 30 June 2021; and
(c) No substantive change to other terms and conditions of the lease.
Rent concession occurring as a direct consequence of COVID-19 pandemic and meets all of the following conditions:
Rent concession not expected to increase total lease payments!
Rent concession after 30 June 2021 cannot qualify!
Other substantive changes❖ Apply IFRS 16 lease
modification guidance!
Amendment to IFRS 16 - COVID-19 rent concessions
COVID-19 related rent concession:
PwCAccounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
Apply consistently to contracts with similar characteristics and in similar circumstances (portfolio approach)! (IFRS 16 para 2)
Amendment to IFRS 16 - COVID-19 rent concessions
Practical Expedient (for lessees)
Lessee can elect not to assess if COVID-19 related rent concession is a lease modification.
Account as if it is not a lease modification (e.g. negative variable lease payments)
No practical expedient for lessors!
Disclosures!
Effective: 1 June 2020
Earlier application is allowed
Retrospective application
PwCAccounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
COVID-19 specific training
Upcoming courses at PwC’s Academy
Financial statement analysis | 10-11 June
Power BI training | 14-15 June
Association of Chartered Certified Accountants (ACCA) | 21 June
Strategic risk based audit planning | 24-25 June
Chartered Financial Analyst (CFA) | 6 July
Certified Management Accountant (CMA) | 25 July
Get in touch
Other development courses and professional qualifications
PwCAccounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
Financial reporting impact of COVID-19 | 14-15 June
Key thoughts on uncertainty
Impact is pervasive and evolving
Significant judgement involved
Changes to previous methods of accounting
Do not leave the assessment to the last minute
Disclosure is key
PwCAccounting for the uncertainty arising from COVID-19 webcast - 8 June 2020
Key PwC reference materials
In depth:
Accounting implications of the effects of COVID-19
Spotlight on ECL for corporates (section on impairment of financial instruments)
In depth:
Intercompany loans(section on impairment of financial instruments)
All PwC COVID-19 accounting resources
Click here Click here Click here
Click here
In brief:
IFRS 16 COVID-19 amendment
Click here
Mohamed ElBornoPartnerME Assurance Leader
Helen WisePartnerME Accounting Consulting Services Leader
Michelle AmjadDirectorME Accounting Consulting Services
Muhammad HassanPartnerAccounting Advisory
Romil RadiaPartnerME Valuations Leader
Contact us
Accounting for the uncertainty arising from COVID-19 webcast - 8 June 2020PwC
pwc.com/me
Thank you
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.Established in the Middle East for 40 years, PwC has 22 offices across 12 countries in the region with around 5,600 people. (www.pwc.com/me).PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
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