Listed companies, investors must prepare for end of COVID-19 accounting relief measures

PwC Thailand said listed companies must study how their financial statement will be affected when COVID-19 relief measures for accounting rules come to an end at the end of this year. It also warned investors to read the notes of financial statements carefully to make sure they understand the relief measures.

 

The expiry on 31 December 2020 of the Federation of Accounting Professions (TFAC) of Thailand’s COVID-19 relief measures for accounting treatments will have an impact on listed companies’ financial statements.

 

The value of significant assets in 1Q21 financial statements, such as accounts receivable, debt and equity securities, deferred tax assets and goodwill, may substantially change. Companies need to assess the implication of these changes early on and clearly communicate the impact with investors.

 

TFAC’s temporary relief measures give companies the option to exclude or give less weight to information related to the COVID-19 in their Thai Financial Reporting Standards (TFRS) financial statements. The relief measures were issued in two parts:

• Guidance on additional accounting options to support companies affected by COVID-19
• Guidance on the accounting treatment for the impairment of loan receivables when a lender assists debtors affected by the economic situation.

 

The first of these will expire on 31 December 2020.

 

Sinsiri Thangsombat, Assurance Lead Partner at PwC Thailand, said: “These temporary relief measures minimised the pandemic’s impact on the 2020 financial statements of a number of listed companies that opted to use them. According to the 2Q20 financial statements of SET100 Index listed companies, 70% of them applied the relief measures. This included all companies in the food and beverage, banking and finance, and securities sectors. On the other hand, only six out of the total of 25 companies in the energy and utilities sector used the TFAC relief measures.”

 

“The listed companies and their investors need to understand what impact the expiry of the temporary relief measures will have on financial statements. Investors also need to read the notes to company financial statements to make sure they know which specific relief measure the company applied and the consequences of its expiry. The relevant notes to financial statements are expected to provide clear and complete information,” said Sinsiri.

 

TFAC’s temporary relief guidance on additional accounting options covers seven main topics: 

• Measuring expected credit losses under a simplified approach (TFRS 9)
• Measuring investment in non-marketable equity securities (TFRS 9)
• Measuring the fair value of financial assets and non-financial assets (TFRS 13)
• Lease modifications (TFRS 16) 
• The reversal of deferred tax assets (TAS 12)
• Assessing impairment indications and impairment testing (TAS 36) 
• Estimating provisions (TAS 37)

 

Sinsiri said that the relief measures mainly affect accounting estimates that depend on future events and have an impact on the value of assets on the balance sheet. An example would be estimating loss allowance for accounts receivable, which requires the company to use information about historical events, current conditions and forward-looking information. The relief measures have allowed companies to exclude forward-looking information from these estimates.

 

The relief on measuring fair value has also permitted companies to measure investment in non-marketable equity securities at the end of each interim reporting period and at the 2020 year-end, using the fair value as at 1 January 2020.

 

Additionally, companies have also been allowed to measure the fair value of non-financial assets and certain types of financial assets by giving less weight to information related to the COVID-19 pandemic in their valuation.

 

The relief measures related to impairment are two-fold. The first part has allowed companies to ignore the impact of COVID-19 when assessing impairment indication. This has meant that so far companies have been exempted from impairment testing of non-financial assets adversely affected by the pandemic.

 

The second part concerns the impairment testing of goodwill and intangible assets with an indefinite useful life, or intangible assets not yet available for use. These are normally required to be tested for impairment irrespective of whether there is any indication of impairment. But the TFAC relief has permitted companies to ignore any information related to COVID-19 that may impact financial projections when estimating the impairment.

 

TFAC’s relief measures have also given companies the option of excluding highly uncertain information related to COVID-19 that would impact estimated future taxable profits. This highly uncertain information would affect how the sufficiency of future taxable profits is determined for the purposes of recognising deferred tax assets.

 

Companies also need to consider other accounting implications besides the ones covered by TFAC’s relief measures when preparing their financial statements for the year ending 2020. These include accounting treatments for debt restructuring, hedge accounting, restructuring provisions, revenue recognition and inventory valuation. Companies need to assess and account for their impact on their annual financial statements for 2020.

 

Sinsiri added that the TFAC relief has had an impact on many significant assets in the financial statements, including:

• accounts receivable
• lease receivables
• property, plant and equipment
• intangible assets
• financial assets including debt security and equity security
• deferred tax assets and
• goodwill.

 

With the TFAC relief measures expiring at the end of this year, companies must apply normal financial reporting standards to their interim financial statements for the period ending 31 March 2021. This may consequently change the value of assets presented in the annual financial statements for the year ending 31 December 2020.

 

According to our analysis of the 2Q20 financial statements of 65 SET100 listed companies, the top two TFAC measures are:

• relief on measuring expected accounts receivable credit losses (66%)
• relief on assessing impairment indication (62%).

 

In addition, 43% used relief on impairment testing of goodwill. This of interest because not every company will have goodwill.

 

This information makes it clear that investors need to read the notes to the financial statements closely to make sure they understand which relief measures have been used. They must bear in mind that each company may have chosen to use different measures with the result that the financial statements may have been prepared on a different accounting basis.

 

“Companies must clearly and completely disclose information about the assumptions and judgements used in their estimations. This is because the financial statements of different companies applying the same relief measures, but with different outlooks, are likely to be affected differently.

 

“Companies must assess the potential impact of the expiry of the relief measures and communicate to investors the implication on their 1Q21 financial statements,” Sinsiri concluded.