COVID-19's impact on quarterly reporting

The World Health Organization (WHO) declared COVID-19 a global pandemic in March, and as we enter May, we will start seeing the first quarterly financial statements reflecting the impact.

Although for most, the period of shut down will be a little over two weeks at March 31, the ongoing uncertainty will have a significant impact on financial reporting.

On May 5, BDO held a webinar to discuss how finance teams, audit committees, and boards can navigate these financial reporting issues.

We outline the main concerns regarding reporting in this climate below.

Reporting deadline

The Canadian Securities Administrators (CSA) announced on March 18, 2020 it will provide temporary relief from some regulatory filings required to be made on or before June 1, 2020. The blanket relief will provide a 45-day extension for periodic filings normally required to be made by issuers, investment funds, registrants, certain regulated entities, and designated rating organizations on or before June 1, 2020. This will include financial statements, management's discussion and analysis, management reports of fund performance, annual information forms, technical reports, and some other filings. Issuers choosing to rely on this exemption and that are complying with the conditions of the relief will not need to file applications for management cease trade orders as they will not be noted in default.

The following table outlines the revised deadlines:

The relief will provide companies with the extra time to manage work restrictions created by social distancing measures and the time to deal with COVID-19 issues. However, it is important to note that dealing with many of these issues will require assistance from valuation and accounting specialists. If most companies take advantage of the full extensions, resource issues will arise as annual and interim reporting deadlines move very close to each other.

Director responsibility for quarterly reporting

Under the Canada Business Corporations Act (CBCA) and those of each province, every director and officer of a corporation, in exercising their powers and discharging their duties, is required to act honestly and in good faith with the best interests of a corporation. When acting with the best interests of the corporation, directors and officers must consider the interests of shareholders, employees, retirees and pensioners, creditors, consumers, governments, the environment, and the long-term interests of the corporation. With that in mind, and their understanding of COVID-19's impact on the corporation and its employees, directors must work to support and challenge management during this time of crisis.

As the first quarter of 2020 ends for many reporting issuers, the board of directors must approve the interim financial report and MD&A before such reports are filed. Under securities regulation, the board of directors may delegate approval of interim filings to the audit committee. However, due to the potentially disruptive impact of COVID-19 on a reporting issuer's financial reporting and disclosure controls, coupled with numerous related financial reporting issues, boards may choose not to delegate this approval process or may play a more active role in the process. Boards may take a more direct involvement in the approval process for the interim filings:

• To discuss significant financial reporting implications including impairment, contract modifications and going concern, and management's approach to addressing these issues.
• To understand management's assessment of changes in the issuer's internal controls over financial reporting that occurred due to lockdown requirements during COVID-19.
• To ensure that the interim MD&A disclosures are consistent with the information provided in the interim financial report and reflect the Board's understanding of the impact of COVID-19 on the reporting issuer.
• To consider the appropriateness of alternative or non-GAAP financial performance measures and whether relevant CSA Staff Notices about such measures have been followed.
• To determine the need to have previous public disclosures reviewed in the light of COVID-19 events and updated as necessary.

While it remains the responsibility of management to run the day-to-day operations of the reporting issuer, the board of directors' oversight role in supervising the management of the business and the affairs of the reporting issuer remains critical in this time of unique challenges.

Auditor involvement in quarters

Reporting issuers in Canada are not required to engage their auditors to perform a review of the interim financial report. If an auditor has not performed a review of an interim financial report then it must be accompanied by a notice indicating that the interim financial report has not been reviewed by an auditor.

If not already engaged, it may be deemed prudent to engage the auditor to perform a review of the interim financial report during times of significant disruption to businesses and their financial reporting. Involving the auditor for a review of the interim financial reports can assist the audit committee (and ultimately the board of directors). The auditor's interim review procedure is for obtaining a basis for reporting to the audit committee as to whether the auditor is aware of any material modification that should be made to the interim financial statements for those statements to be in accordance with the applicable financial reporting framework. The interim review may flag significant matters affecting interim financial statements to the auditor that can be communicated to management and the audit committee.

It may also be prudent to engage auditors to perform audit procedures at the interim period related to specific concerns. Early performance of audit procedures will not result in an opinion or any other form of assurance on a financial statement assertion or the interim financial report.

Accounting considerations

COVID-19 affects a number of financial reporting matters. For purposes of this publication we will focus on the most pressing matters—impairment, discount rates, going concern uncertainty, and disclosures.

Impairment

Although the shutdowns related to COVID-19 may not have affected the entire quarter's operations, the expected impact needs to be considered at March 31, 2020 when looking at expected credit losses and future cash flow projections used in impairment testing.

Many companies will experience an economic loss because of the virus. These incurred and expected losses need to be examined for significance and duration to determine the impact on impairment assessments. Inventory, goodwill, intangible assets, non-financial assets, financial assets, and investments will all need to be assessed.

Quarterly financial statements will need to consider information available at the reporting date related to impairment and other significant estimates. Issuers will need to assess whether impairment indicators exist at quarterly reporting periods, even for assets subject to annual impairment testing. Given the uncertainty as of March 31, 2020, it is expected that many companies will have indicators of impairment. This may result in a company doing multiple impairment tests throughout the year. Entities should be prepared for the extra time needed in making such estimates.

In the measurement of impairment, an entity may rely on fair value measurements at interim. The objective of a fair value measurement is to determine the price at which an orderly transaction would take place between market participants under the market conditions that existed at the measurement date. Given that the impact of the virus continues to evolve, careful consideration will need to be applied to determine if appropriate valuations are applied consistently. Our valuation team can help companies with such issues.

Discount rates

Discount rates impact many of the estimates that a company must make at each reporting period. As of March 31, 2020, discount rates were moving for various reasons. Central banks are lowering rates, while credit spreads and other risk adjustments are increasing due to the ongoing uncertainty. These changes in discount rates need to be considered in the following estimates:

• Impairment calculations will be impacted by increased discount rates, which will lower the recoverable amount and increase the likelihood of impairment.
• Asset retirement obligations are typically measured using a risk free rate. The drop in risk free rates will increase the amount of the liability.
• Defined benefit obligation are discounted using the rate on high quality bonds. As bond rates change actuarial calculations for pension liabilities.

There are many other areas impacted by discount rates. Our valuations team can assist with many of these discount rate changes.

Going concern

In assessing the entity's ability to continue as a going concern, management must take into account events after the date of the financial statements. Regardless of the reporting period, management will have to consider all factors known up to the date of authorization of the financial statements. Management will need to look at the following in assessing going concern:

• Updated financial forecasts for the foreseeable future, but not less than a 12-month period
• Updated sensitivity analysis
• Forecasted compliance, or lack thereof, with banking and other covenants for the foreseeable future
• Any other information available up to the date the financial statements are authorized for issuance

Based on the information available, an entity will consider whether or not there is material uncertainty, which raises significant doubt about their ability to continue as a going concern. In extreme cases, an entity will need to determine if the financial statements should be prepared on a going concern basis, or if another basis of preparation would be more appropriate.

Financial statement disclosures

Transparent disclosures should be made based on the effects and risks of this outbreak on the company and the various estimates reflected in the financial statements. This disclosure would generally provide information on the nature of the event and a qualitative or quantitative estimate of its effect on the financial statements. As a result, we expect the disclosures to be much more robust than what is typically seen in interim financial statements due to companies operating in a much different environment than they were at their last annual financial statements.

Public disclosure documents for reporting issuers

Companies will have to consider this from both a financial statement standpoint and for their other public disclosure documents, including the Management Discussion & Analysis (MD&A) and Annual Information Form (AIF). Reporting issuers must consider whether disclosure is required to address the potential impact of the outbreak on business operations and financial results. Entities should consider the inclusion of risk factors and forward looking information in its MD&A and AIF.

Such risk factors include disruptions to business operations resulting from:

• Quarantined employees
• Customers and suppliers in areas affected by outbreak
• Closed manufacturing facilities and supply chains
• Travel restrictions
• Reduced consumer spending
• Effects on proposed acquisitions or planned expansions
• Overall uncertainty surrounding the impact of the spread of the virus

Along with risk factors, entities should consider COVID-19's impact on whether it's reasonable to disclose forward-looking information. Entities should consider relationships within the reporting issuers' customer base and supply chain. Companies may be challenged with reasonably predicting the actions of others in uncertain, ever-changing times on a global front. Where forward-looking information continues to be disclosed, entities should:

• Identify material risk factors that could cause actual results to differ
• Disclose material factors and assumptions used to develop the information
• Disclose in subsequent MD&A any material differences between actual results and any FOFI or financial outlook previously disclosed

Reporting issuers should avoid boilerplate disclosure concerning COVID-19 in filings. Rather, they should focus on entity-specific information that is clear and relevant to allow investors to understand how the virus impacts business. As the virus evolves, so will the financial impact and disclosures. Entities should ensure that processes are in place to continue to monitor and update the impact of this outbreak on the financial statements and the related disclosures.

We can help you manage the financial reporting implications for your company.