We need to think slowly during the coronavirus crisis
Day by day, individuals, companies and governments are assessing the impact of the coronavirus on public health and the global and national economies. Very little is certain except that it is having a wide-ranging impact and will affect 2020 reporting periods and onward in terms of numbers that are reported. Having said this, consideration of the impact would require disclosure in 2019 financial statements. In times that are as uncertain as these, accurate and transparent financial information is more important than ever, given the role this plays in business decision-making.
We are working at full steam to support clients as details unfold and the impacts on short, mid and long-term earnings become clearer. Given the fast-paced dynamic and the exhaustion that many of us are probably feeling, I want to appeal to you: Let us all please not forget to slow down and do the scenario planning we need on so many fronts.
When I say we need to slow down and think, I mean we should break down the different components of what might happen and understand which first, second and third-order impacts could emerge for the business. As mentioned, entities with reporting periods ending after 31 December 2019 will need to consider the effects of the outbreak in impairment calculations, revenue recognition, going concern assessments and more. Please see here for a recent BDO paper on this.
In my opinion, financial services companies should be focused on assessing their risk exposures and identifying areas of stress based on various scenarios. This should be done while keeping the coronavirus in perspective. I am concerned about tunnel vision and people thinking only about the substantial risk to companies like airlines, cruise liners and hotels. I say take a broader view and consider second and third-order effects (both blue-sky and not-so-blue-sky).
In terms of accounting, a number of estimates are done on a forward-looking basis, such as IFRS 9 expected credit losses. While defaults are expected to increase, there is also financial aid being committed by governments. Impairment tests for non-financial assets are also done on a forward-looking basis. They are based on cash flows generated in the future that are discounted back to the present value to determine the recoverable amount. Clearly, these cash flows are going to be impacted by the coronavirus. But so is the discount rate. While cash flows are less, central banks are cutting rates drastically so the discount rates will also be less for a period of time as well. And there will be increased requests for refunds, which will impact revenue recognition, and so on and so forth.
Some sectors are benefitting and governments are taking steps to boost economies. For instance, Germany has loosened its long-held rules on debt spending. It is therefore important to pay attention to developments holistically and reflect on them in a thoughtful manner in terms of the overall impact.
So please run all such scenarios through your models, and as we like to say, please keep calm and carry on.