Estimating COVID-19 impact for smaller banks, insurers and investment houses

Accountants have been debating whether coronavirus will be seen as an adjusting event for financial statements closing on 31 December 2019 or whether it will be seen as one that impacts 2020 financial year-ends and onwards. The consensus it is that it will very largely be seen as a pure 2020 event. The understanding of its impact did not crystalize until earlier this calendar year in terms of effect on numbers that are to be reported, but consideration of the impact still requires disclosure in the 2019 financial statements. This is because the World Health Organisation declared the outbreak a Public Health Emergency of International Concern on 30 January 2020.

I share this now because it is important to have clarity on the matter as a basis for managing the impact of the coronavirus on accounting and financial reporting. Banks are already taking stock of where customers they have lent to are located and what industries they work in. Insurers are focused on policy type, location and the business of policy holders. Investment houses are determining who they have invested in, where those investees are geographically situated and what it is that they do. But smaller banks, speciality finance houses and niche insurers may be finding it difficult to take stock on these matters because they have their hands full with other aspects of COVID-19, such as continuing to operate when their employees can only work from home.

In my view, these companies should put an emphasis on assessing the extent of their exposures and on recovery and stress scenarios without going too positive or negative, given the impact of coronavirus is still widely unknown. This is because, when you roll the clock forward, this impact will need factoring in to those financial statements that relate to periods commencing on or after 1 January 2020. Companies with 31 March year-ends, for example, will need to factor in the impact on their accounting and financial reporting now.

While this will be extremely hard, it still needs doing. Some considerations are outlined in a recent BDO paper  and here as well. Thoughts in this space are developing very rapidly. For example, there is talk of understanding the impact on your business if indeed you were to have no revenue for the next three months and also on the cost base. Another example is of asset managers thinking about lower management and performance fees as a result of managing a reduced asset base. It is likewise good to model the impact of fiscal measures that are on their way.

Companies should also know that they will most likely be asked not to publish financial information in the very short-term given the uncertainty due to coronavirus. The UK’s Financial Conduct Authority (FCA) has requested that all listed companies observe a moratorium on the publication of preliminary financial statements for at least two weeks, and the Financial Reporting Council, the national competent authority for accounting and financial reporting in the UK, supports the FCA’s request and clarifies that this extends to wider corporate reporting.

The FRC wrote: “Recent unprecedented events mean that the basis on which companies are reporting and planning is changing rapidly… The FRC therefore encourages listed companies and their auditors to consider carefully whether they should delay other corporate reports for the next two weeks, such as interim financial statements and final audited financial statements, except where necessary to meet a legal or regulatory requirement.”