Splitting out COVID-19 implications in 30 June 2020 financial reports and COVID-19 significant items

The economic fallout from the global COVID-19 pandemic is likely to significantly impact the financial position and results of most entities during the 30 June 2020 financial year (or half-year).

COVID-19 was only declared a global health emergency by the World Health Organisation on 31 January 2020, and governments around the world implemented travel restrictions, social distancing measures, and lockdown restrictions at different times. For example:

Australia placed a ban on travel from Wuhan on 1 February 2020, so businesses dependent on inbound travel from China would therefore have been impacted from early February (e.g. universities).
Gyms, beauty salons and the NRL were shut down around 21 March 2020, so any COVID-19 impacts would be greater from this date onwards.

It is therefore impossible to establish a ‘bright line’ date for all entities so that we can say whether results are ‘pre-COVID-19’ or ‘post-COVID-19’. It is along these lines that the Australian Securities and Investments Commission (ASIC) issued its COVID-19 FAQ No.5(main points summarised below) to clarify its position on entities splitting results into a pre-COVID and post-COVID period, and also how non-IFRS information should be presented in a COVID-19 world.

Operating and financial review (OFR)

FAQ No. 5 notes that splitting profit or loss between pre-COVID-19 and post-COVID-19 periods is problematic and can be potentially misleading because:

The cut-off date between the two periods cannot generally be clearly identified
The pre-COVID-19 period may not be representative of performance in future
Changes between pre-COVID-19 and post-COVID-19 results could be impacted by factors other than COVID-19 (e.g. other economic factors), and
The effects of the pandemic are unlikely to be constant or uniform during the post-COVID-19 period.

FAQ No. 5 also notes that all drivers underlying the results should be discussed in the OFR, including the effects of the pandemic, as well as other drivers that have had a significant impact on the results.

In other words, don’t blame everything that went wrong on COVID-19.

This would be true when discussing impairment losses and reductions in sales revenue, where it may not be possible to separately quantify the impacts due to COVID-19 and the impacts due to other causes, but the cause is not simply COVID-19. Lastly, ASIC urges caution describing COVID-19 related expenses as being non-recurring, particularly where the effects of COVID-19 cross over balance dates.

Hypothetical results

ASIC also notes that non-IFRS profit measures that attempt to show results had COVID-19 not occurred are likely to be misleading because they are hypothetical and it may not be possible to reliably identify and separately quantify the impact of the COVID-19 pandemic. Directors should refer to RG 230 Disclosing non-IFRS financial information in this regard.

Presentation in financial statements

Regarding presentation of the impact of COVID-19 in the financial statements, ASIC notes the following in FAQ No. 5:

1.	Don’t split the face of the income statement into a pre-COVID-19 period and a post-COVID-19 period for the reasons noted above.
2.	Segment results should cover the entire reporting period, and should not exclude the result for all, or a part of, the post-COVID-19 period.
3.	Some types of significant items that arise solely because of COVID-19 (e.g. impacts of government stimulus measures) may be quantified and disclosed separately in the notes as significant items, but should include an explanation as to why the item is solely COVID-19 related.
4.	It is not appropriate to treat all ongoing operating costs as a significant item during a period of reduced revenue.