Event after the balance sheet date
For the financial statements 2019 closing on 31 December 2019, the financial impact of the Covid-19 outbreak is a ‘post-balance sheet event’. For companies with a financial year that does not coincide with a calendar year, it goes without saying that the impact of Covid-19 will in any case have to be taken into account in the preparation of the annual accounts and the management report. It is up to the company to assess and process this.
Event after the balance sheet date that does or does not provide further information about the actual situation on the balance sheet date?
The statement of the Dutch Council for Annual Reporting assumes that the consequences of the Covid-19 outbreak are events after the balance sheet date that do not provide further information about the actual situation on the balance sheet date (because this was not yet an issue at year-end or did not affect the company’s activities). This means that the impact of Covid-19 is not included in the 2019 financial statements. This is only different if, because of Covid-19, the continuity assumption can no longer be applied at all. The financial statements must then be prepared taking into account a liquidation scenario of the company.
Notes to the 2019 financial statements
If events after the balance sheet date (such as the financial impact of Covid-19) are material to the judgment of the users of the financial statements, the company will have to elaborate on this. The elaboration addresses, among other things, the impact of Covid-19 on the financial position and operations of the company. It is important to explain as clearly as possible exactly what influence Covid-19 has (e.g. suppliers), which factors are even more relevant and what measures have been taken. If there is not yet clarity, companies will have to describe the uncertainty and the possible expected impact on the company as well as possible.
Management report
The management report should identify the main risks and uncertainties and look to the future. The consequences of Covid-19 for the company are also part of this. In addition to the disclosures included in the financial statements, the company should disclose the risks and uncertainties related to Covid-19.
Audit of the financial statements by the auditor
In a situation like this there is not a one-size-fits-all approach possible, the same applies for the audit conducted by the auditor. After all, the impact of Covid-19 is difficult to estimate and the impact will be different for each company. When auditing the financial statements, the accountant will not only be focused of financial circumstances on the balance sheet date, but also of events after the balance sheet date.
The auditor’s report
In general, if there are significant uncertainties about continuity and those uncertainties are adequately and clearly disclosed in the financial statements, there is (in principle) no reason for an auditor to issue an unqualified opinion. In short, the user of the financial statements is provided with certainty about the extent and content of uncertainties. However, the auditor will include a section on continuity in his audit opinion.
Given the current situation, this uncertainty could only consist of Covid-19 related uncertainties. However, there are certainly conceivable situations in which there was already uncertainty about the continuity of the company and that the company on top of this is also confronted with the consequences of Covid-19. In all cases the auditor tests the total impact of those uncertainties on the continuity. In those cases where uncertainty was already present, the company often already has liquidity forecasts (without the influence of Covid-19) and the auditor will check whether the elaboration is sufficiently clear and whether the continuity assumption as it was drawn up may be used taking into account the Covid-19 situation.
If the auditor does not obtain sufficient assurance from the company about the uncertainties the company is facing, the auditor may: (i) issue a qualified opinion, (ii) a disclaimer of opinion or (iii) issue an adverse opinion. With the first report, the auditor approves the financial statements with the exception of one component. The second opinion means that the auditor cannot approve or disapprove as there is an uncertainty that has a profound effect on the financial statements. The annual accounts are rejected if the auditor believes that the annual accounts do not meet the set requirements.
In its Alert 42 in response to the Covid-19 situation, the NBA emphasises that inherent uncertainty on the part of management does not have to lead to the conclusion that the notes are inadequate, in which case there is no reason not to issue the auditor’s report. In order to reduce the management’s uncertainty (due to the passage of time), the auditor could insist on postponing the auditor’s report and to wait with the preparation of the financial statements.
In any case, it is essential to remain in discussion with the auditor so that the auditor can form a complete picture of the company in the current circumstances in order to be able to issue an audit opinion as soon as possible.
In conclusion
Despite the exceptional situation, and despite the expectation that a continuity paragraph will be included in many of the auditor’s reports that relate to the 2019 annual accounts, the rules that apply to the assessment of the continuity of the company (do) remain the same. The organisation remains responsible for evaluating the impact of Covid-19 events and the appropriate disclosures in the financial statements. The auditor must obtain sufficient and appropriate audit evidence to assess whether management’s disclosure of the Covid-19 continuity events is adequate. These principles will continue to be valid.
