As a Worthing accountant I’m seeing the effect of the lockdown on a wide number of local businesses. Covid-19 has brought some businesses to a standstill, but many others are managing to keep going.
While the government has done much to help, companies will still need to file their accounts and complete financial statements. In this post I just want to give some guidance on how to show the affect the pandemic has had in your annual reports.
A key point is that if your company balance sheet date is before 01 January 2020, it will not have had any effect this year. The virus was only discovered in that month so there is no way you could claim it had any impact prior to that in the UK.
Adjusting or Non-Adjusting Event?
If the pandemic has affected your business and you want to show this, you must first decide on whether it has been an “Adjusting” or “Non-Adjusting” event. This simply means at the time of your balance sheet date, did the virus exist. Did you see a real impact from its effects on the business.
If you decide there hasn’t been an impact on your business, and you were able to carry on as normal, then you don’t need to make any adjustments to the assets or liabilities of the business. Hence the term Non-Adjusting.
As the event had such an impact across the economy generally, however, it would still need to be disclosed in the financial statements if it is considered material. This would be the case if not referring to it would prevent the reader from evaluating the business in the right context. The aim is to provide a clear idea of how the business sits within its industry. Not referring to such a global event may leave the reader wondering why it has not even been mentioned.
This is a bit of a grey area and you should discuss this with your accountant to decide the right information to put in the financial statements.
If the pandemic has had a direct effect on the business, then this needs to be evaluated. Where it can be shown the actual value of assets and/or liabilities has altered because of the lockdown, a correct Adjustment needs to be calculated and shown in the financial statements.
Examples of just what may need to be reflected in the statements include:
- Details of exactly which assets have been affected because of the virus. Have they been contaminated by (potentially) infected workers? Will they need to be replaced or deep cleaned? Will they need to be tested to ensure they are safe to use again? This applies to intangible assets as well. Has goodwill or brand equity been damaged in any way?
- Has the knock-on effect with other companies made certain contracts problematic? Will the relationship with those companies be as viable or valuable as it was?
- Is the business able to offer the same employee benefits as it did before? Is it able to sustain the same pension and salary packages?
- Where fair values are shown in the financial statements, have these been accurately worked out. Bearing in mind the changing business landscape following the lockdown, are they truly a reflection of what an item is worth now?
- Should the business consider writing off certain debts? The suddenness of the lockdown crippled many businesses and halted their cash-flow entirely. Is the expense and effort of chasing payment from a failed business that clearly can’t pay even worthwhile?
- Did the business benefit from government assistance? With either with a grant or a loan, how is this accounted for in the financial statements?
The Defining Factor
A key factor that should be made clear is whether the pandemic has resulted in a change of the status of the business. Under normal circumstances business accounts reflect a “Going Concern”. If the business fell into trouble because of the effects of the lockdown, did the management use the additional protections the government offered. Additional statements and disclosures would need to be made to clarify this. This is because the easing of the rules by the government has allowed them to continue as a going concern, even though it would not have been allowed prior to the crisis.
You can find more information about the official guidance here:
The guidance is very much written by accountants for accountants. However, it does provide you with some of the clear background information I’ve referred to. The underlying message throughout is:
- Take a clear view of what has happened and find a way to express that in financial terms for your business.
- Be able to back up your assessment with records and notes on how you got to your figures.
- Be realistic, at some point the pandemic will be over. You need a really clear and accurate picture of the shape your business is. That way you have the best chance of getting back to where you were.
And don’t be shy about working closely with your accountant on this. I work with many Worthing businesses, of all sizes. I am the first to acknowledge that no-one understands a business better than the owner. We’re all in uncharted territory with a lot of this. You will be doing yourself and your accountant a favour if you take the extra time this year to get your financial statements right.