Accounting Considerations Related to the COVID-19 Outbreak 03 CO… · Accounting Considerations Related to the COVID-19 Outbreak This communication contains a general overview of

MNP.ca

Accounting Considerations

Related to the COVID-19 Outbreak

April 2020

Accounting Considerations Related to the COVID-19 Outbreak

This communication contains a general overview of the topic and is current as of April 20, 2020. This information is not a substitute for professional advice and we recommend that any decisions you take about the

application or not of any of the information presented be made in consultation with a qualified professional. Contact your local MNP representative for customized assistance with the application of this material. MNP

LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2020. All rights reserved.

Background ............................................................................................................................................................................. 1

Subsequent Events .................................................................................................................................................................. 1

Going Concern ......................................................................................................................................................................... 2

Fair Value Measurement ......................................................................................................................................................... 3

Impairment ............................................................................................................................................................................. 4

Changes to Operations ............................................................................................................................................................ 5

Government Support & Insurance Proceeds .......................................................................................................................... 6

Other Estimates ...................................................................................................................................................................... 7

Presentation & Disclosure Requirements ............................................................................................................................. 10

Impact on Lending Agreements and Other Contracts .......................................................................................................... 13

Filing Requirements or Reporting Deadlines ........................................................................................................................ 13

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Background The recent COVID-19 (a.k.a. coronavirus) outbreak in Canada has had a significant impact on businesses through the restrictions put in place by governments regarding travel, business operations and isolation/quarantine orders. This document discusses existing accounting and disclosure requirements under the Canadian accounting standards that should be considered when addressing the impact of COVID-19 on the entity’s operations and financial statements. Please note that this document does not contain an exhaustive list of accounting considerations, and their applicability will depend on the facts and circumstances related to each entity. Furthermore, this document does not contain the relevant accounting requirements for all financial reporting frameworks. It is the responsibility of the reader to review the relevant accounting requirements of their respective financial reporting framework, particularly the disclosure requirements. Where possible, the relevant standard within the financial framework has been noted for:

• International Financing Reporting Standards (“IFRS”)

• Accounting Standards for Private Enterprises (“ASPE”)

• Accounting Standards for Not-for-Profit Organizations (“NPO”)

• Public Sector Accounting Standards (“PSAS”)

Subsequent Events Subsequent events are those events that occur between the end of the reporting period and the date when the financial statements are authorized for issue (i.e., the latter of the date the auditor or accountant signs off on the financial statements because they have obtained sufficient appropriate evidence and when the client approves their issuance). Generally, there are two types of subsequent events:

• Those that provide evidence of conditions that existed at the end of the reporting period and therefore require the financial statements to be adjusted; and

• Those that are indicative of conditions that arose after the reporting period and therefore do not require the financial statements to be adjusted, but may require disclosure within the financial statements.

The COVID-19 outbreak emerged near the end of 2019 with the first few cases being identified in late 2019, and China later notifying the World Health Organization (“WHO”) of this new virus on December 31, 2019. The virus has continued to evolve through early 2020, with WHO declaring the outbreak a public health emergency of international concern on January 31, 2020. The first presumptive case of COVID-19 in Canada was confirmed in late January 2020 and, subsequently, the numbers of confirmed and presumptive cases in Canada have significantly increased. Many Canadian municipalities and provinces have responded by declaring local states of emergency in early to mid March 2020 with isolation and business closure measures put in place across most of Canada in late March 2020. As this timing coincides with many entities’ fiscal year ends, entities impacted by the COVID-19 pandemic will need to assess how these events have, and may, impact their operations. Management will need to consider the facts and apply critical judgement in assessing what specific events, and more importantly the timing of those events, provide evidence of conditions that existed at the end of the reporting period in order to determine if an adjustment is required. Where an adjustment isn’t required, the entity will need to determine if disclosure of the event is required. Where an entity prepares interim financial statements, management will need to consider whether there are events that existed before or as at the interim reporting date which require adjustment in the financial statements. Also, for events that arose after the interim period, entities will need to consider what disclosures may be required.

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Management should review the relevant standards in order to assess the disclosure requirements for both interim and year-end financial statements.

IFRS: IAS 10 Events After the Reporting Period, IAS 34 Interim Financial Reporting ASPE & NPO: Section 3820 Subsequent Events PSAS: PS 2400 Subsequent Events

Going Concern When preparing financial statements, management is required to assess the entity’s ability to continue as a going concern. Financial statements are prepared on a going concern basis unless management either intends to liquidate the entity (i.e., entity ceases to operate, is wound up or dissolved and the net assets of the entity are redistributed) or to cease trading, or has no realistic alternative but to do so. When management determines the use of the going concern basis of accounting is not appropriate in the circumstances, management may be required, or may elect, to prepare the financial statements on another basis (e.g., liquidation basis). Disclosures are required when either:

• The going concern basis is not used, including the basis of accounting used to prepare the financial statements; or

• Management is aware of material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.

Note! Subsequent events disclosure should include quantification of the expected impacts on the entity, where possible. Non-entity specific statements regarding the general economic environment is of limited value to financial statement users. Where a precise estimate of the financial effect of the COVID-19 outbreak on the entity is not possible, disclosure of a range of possible impacts or a qualitative discussion of the likely impacts on the entity should be considered.

Note! For entities with a reporting date (i.e., year-end or quarter) on or before December 31, 2019, we do not anticipate that adjustments to the financial statements will be required given that Canada and the United States were minimally impacted as at that date. That being said, for entities that have not yet issued their financial statements, disclosure would likely be required regarding the current and expected future impact of COVID-19 on the entity’s operations. Where an estimate of the financial effect is not yet known and/or reasonably measurable, this fact should be disclosed.

For entities with a reporting date after December 31, 2019, including interim reporting periods, adjustments to the financial statements may be required given Canada and the United States saw their first few cases of COVID-19 in January 2020. By March 2020, COVID-19 started to have an impact on the Canadian economy and individual businesses. Therefore, we would expect adjustments to financial statement balances on several entities’ financial statements prepared for the year or quarter ended March 31, 2020. The adjustments to be reflected would be based on circumstances existing as at March 31, 2020 and may include the impairment of assets, decreases in the fair value for financial assets and liabilities, the recognition of new liabilities or revisions to existing liability balances, the recognition of receivables for government assistance or other funding earned/awarded but not yet collected, changes in the basis of accounting due to the entity no longer continuing as a going concern, etc. In assessing whether an adjustment is required, management will need to consider the nature of their operations and their geographic location in relation to the spread of the virus at that time, as well as the timing of policies put in place by local governments in locations where the entity operates.

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Management will need to consider the existing and anticipated effect of COVID-19 on the entity’s activities and their ability to continue as a going concern for at least, but not limited to, 12 months following the end of the reporting period. Entities impacted by COVID-19 will need to consider factors such as their future expected profitability/cash flows, ability to meet debt repayment and other obligations, financial support from the various levels of government, support from lenders/third parties, and the ability to obtain financing or other cash injections, if needed.

Further, the going concern assessment shall be continually updated up until the date the financial statements are issued, and management is required to consider all information about the future, including new information obtained up until the date of issuance. This may prove to be very difficult given that considerable changes in the spread and impact of the virus are occurring over only a day or two. For entities that prepare interim financial statements, management will need to consider any new information and changes since year-end that may impact the entity’s ability to continue as a going concern. Given the ever evolving nature of the COVID-19 pandemic, it is possible that material uncertainties related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern may surface within a matter of months in the current economic environment. IFRS: IAS 1 Presentation of Financial Statements ASPE & NPO: Section 1400 General Standards of Financial Statement Presentation PSAS: PS 1000 Financial Statement Concepts Assurance Standards: Canadian Auditing Standard (“CAS”) 570 Going Concern, Canadian Standard on Review Engagements (“CSRE”) 2400 Engagements to Review Historical Financial Statements

Fair Value Measurement The accounting requirements of various standards require fair value measurement for certain financial statement items. While the exact definition of fair value varies by framework, generally speaking, fair value is the amount of consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.

COVID-19 will undoubtedly impact the measurement of fair value for some financial statement items; however, whether an adjustment is required for a specific reporting period depends on the timing of the impact to an item’s fair value. When measuring fair value, management must consider the facts and circumstances that existed at the measurement date and that were known or knowable by the parties. Accordingly, management will need to evaluate the information that is available at the applicable measurement date for the financial statement item and/or their reporting date with respect to COVID-19 in order to assess whether that information would have impacted the price either party would have been willing to accept for that transaction.

Note! In addition to assessing internal factors, management will also need to consider external factors such as commodity and foreign exchange fluctuations, their customers’ ability to pay, suppliers’ ability to provide goods/services and counterparties’ ability to make loan/debt payments. Given the continually changing nature of the COVID-19 pandemic, management must continually obtain and assess new information as it arises in order to assess the impact to the entity.

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The disclosure requirements related to fair value measurement vary by standard and framework. Nevertheless, it is important that sufficient disclosure is provided in order for users of the financial statements to understand if, and how, COVID-19 has impacted the entity’s fair value measurements including the assumptions and judgements of management, inputs to the model, and the evidence those assumptions, judgements and inputs are based upon.

IFRS: IFRS 13 Fair Value Measurement ASPE & NPO: Various standards – including, but not limited to, those related to financial instruments, investments, goodwill and intangible assets, property plant and equipment. PSAS: Various standards – including, but not limited to, those related to related parties, portfolio investments, loans receivable, tangible assets.

Impairment Entities are required to assess goodwill and both tangible and intangible assets for impairment. The timing of these impairment assessments is dependent on both the type of asset and the accounting framework applied. In performing this assessment, management shall consider events that occurred after the reporting period if they provide evidence of conditions that existed at the end of the reporting period. COVID-19 has impacted many markets, the economic environment and may also impact the extent or manner in which a particular asset is used. All of these factors, along with other information, should be considered when assessing the indicators of impairment.

Note! Similar to the subsequent events discussion, for entities with a reporting date (i.e., year-end or quarter) on or before December 31, 2019, we do not anticipate that adjustments to the fair value of financial statement items will be required unless the item’s fair value was impacted by the events surrounding COVID-19 occurring in China by the end of 2019. However, disclosure of any large swings in fair value since the entity’s reporting date may be warranted. For entities with a reporting date after December 31, 2019, adjustments to the financial statements may be required given the economic disruptions in China arising from the Coronavirus virus began to impact the US and Canadian stock markets in early 2020. For entities that prepare interim financial statements, careful consideration is required to assess whether any adjustments are needed to the fair value of financial statement items when the interim period ends on or after March 31, 2020. Management will need to consider the fact and circumstances that existed at the end of the interim period in assessing whether an adjustment is required.

Note! COVID-19 has impacted both the financial markets and private entities, as well as commodity prices and

foreign currency rates, resulting in large swings in the fair value of some investments and other assets. Where

entities’ investments and other assets are subject to large swings in fair value, this fact should be disclosed in the

financial statements assuming it is material and/or would reasonably be expected to have a significant effect on a

financial statement user’s decisions, the entity’s market price or value of the entity, etc.

Furthermore, the virus may impact discount rates used in discounted cash flow projections. Although the risk-free

rate may have decreased in response to the COVID-19 crisis, there may need to be a higher risk premium added

to the entity’s discount rates related to the uncertainty in the market. Clients should assess whether they need to

obtain advice from external valuation experts to assist them in establishing an appropriate fair value measurement

and the discount rates to be used in these estimates.

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Furthermore, where an asset is impaired, the determination of the recoverable amount should also consider information obtained after year-end, providing such conditions existed at the reporting period. Where future cash flows are used to determine the recoverable amount of an asset, management will need to estimate those cash flows based on the expected economic conditions over the remaining life of the asset. Therefore, entities impacted by COVID-19 need to estimate the impact of this pandemic on their future cash flows.

In addition, as noted above in the Fair Value Measurement section of this guide, the virus may impact discount rates used in discounted cash flow projections. Careful consideration is needed in determining the appropriate discount rate.

Given the uncertainty of the current environment and the high degree of judgement required in performing these assessments and calculations, it is important that the entity provides detailed disclosure of their assumptions, judgements and inputs, including the evidence they are based upon, as well as the impact a change in key assumptions and/or inputs may have.

IFRS: IAS 36 Impairment ASPE & NPO: Section 3063 Impairment of Long-lived Assets, Section 3064 Goodwill and Intangible Assets PSAS: PS 3150 Tangible Capital Assets

Changes to Operations As a result of COVID-19, entities may temporarily change the nature of their operations (e.g., manufacture medical supplies or other high demands products, such as hand sanitizer) in order to continue to operate through the pandemic or in response to a request by the government. In changing its operations, there are a number of factors the entity must consider:

• Presentation of discontinued operations - Unless the entity is planning to dispose of their normal operations or has classified its normal operations as held for sale, we do not anticipate that the entity’s normal operations would be considered discontinued operations given the change in operations is expected to be temporary. However, if the entity plans to permanently change its operations and discontinue its existing operations, management will need to

Note! The Government of Alberta has granted entities with mineral lease agreements set to expire between

March 20, 2020 and December 31, 2020 a one-year lease extension option in order to provide increased certainty

for the energy industry by allowing additional time to raise capital and plan for future activities. Entities wishing to

take advantage of this one-year extension are required to submit an application to the government. Entities that

extend their mineral lease agreement will need to consider the impact this extension option may have on the

entity’s:

• Accounting for the lease agreement, specifically the accounting for the modifications made to the lease term and any other modified terms within their specific extension option agreement; and

• Impairment assessment for its exploration and evaluation (E&E) assets as the expiry of mineral leasing agreements is often an indicator of impairment for E&E assets.

Note! For entities with a reporting date (i.e., year-end or quarter) on or before December 31, 2019, we believe it

would be unlikely that impairment conditions existed as at that time. However, this is not an appropriate assumption

for all entities with a reporting date after December 31, 2019. Furthermore, entities that prepare interim financial

statements will need to assess whether any indicators of impairment exist and, thus, whether any of its assets are

impaired, at the interim period by considering the facts and circumstances that existed at the period end.

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perform an assessment in accordance with the relevant standard to determine how this change should be accounted for.

• Restructuring costs - A restructuring can comprise numerous activities, including termination or relocation of a business, a change in management structure and layoffs. In changing its operations, the entity may incur costs associated with the restructuring of its operations. Management will need to assess whether a restructuring provision/obligation should be recognized prior to the costs being incurred in accordance with the relevant accounting framework.

• Government assistance – Where the change in operations is a result of government intervention, the entity may receive government funding to assist with the costs of obtaining equipment, retooling machinery, obtaining supplies, employee training expenses, etc. Management will need to assess the nature of the funding provided by the government and the requirements of the relevant accounting framework in order to determine the appropriate accounting treatment and disclosure of such assistance. For example, management will need to determine, per review of any funding agreement, whether the purpose of the funding is to reimburse the entity for current and/or future expenses and/or to be used toward the acquisition of tangible assets.

• Disclosure – Entities are required to disclose information regarding the nature and financial effects of the business activities in which it engages. Where an entity has changed the nature of its operations as a result of COVID-19, appropriate disclosure of that change and the revised nature of its business should be included within the financial statements. Entities that change their operations will also need to consider whether they’re required to provide segment disclosures, in accordance with their relevant accounting framework.

IFRS: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IFRS 8 Operating Segments, IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, IAS 37 Provisions, Contingent Liabilities and Contingent Assets ASPE & NPO: Section 3290 Contingencies, Section 3475 Disposal of Long-Lived Assets and Discontinued Operations, Section 3800 Government Assistance NPO: Section 4410 Contributions – Revenue Recognition PSAS: PS 2700 Segment Disclosures, PS 3320 Contingent Assets, PS 3410 Government Transfers, PS 3430 Restructuring Transactions

Government Support & Insurance Proceeds The Government of Canada has announced various economic measures, such as the Canada Emergency Wage Subsidy, Temporary 10% Wage Subsidy and Business Credit Availability Program to name a few, which commit to providing support to businesses through the current economic environment. Provincial governments have also implemented similar or other economic measures to assist businesses during these unprecedented times. The recognition and presentation of any government support in the financial statements will depend largely on the accounting framework applied by the entity and the nature of the support provided. In determining the appropriate accounting for any support received, management will need to consider the following:

• Whether the support received meets the definition of government assistance in accordance with the relevant accounting framework - Generally speaking, government assistance is defined as governmental actions that provide specific assistance to an individual entity qualifying under certain criteria.

• The form of the government support - Government support may come in various forms including non-repayable subsidies, forgivable loans, below-market interest rate loans, non-monetary assets, the waiving or deferral of expenses, etc.

• Whether the recognition criteria in accordance with the relevant accounting framework are met – Generally, the entity will recognize the government support when it has reasonable assurance it will comply with the eligibility criteria for the support, the support will be received and the amount to be received is measurable. Management will need to carefully evaluate the eligibility criteria for the government support to determine whether the entity can reasonably expect to receive such support or whether any support received may need to be repaid.

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• The period to which the support relates - As certain types of government support is being provided retrospectively by some governments, it is possible that the support received may relate to prior periods. Management will need to determine the appropriate period in which to recognize any support received by considering whether the support compensates for expenses already incurred, current or future costs.

• The existing accounting policies of the entity regarding government assistance – Entities may have existing policies or may need to develop new policies for the accounting of government assistance.

• The relevant presentation and disclosure requirements – The presentation and disclosure requirements related to government support will depend largely on the nature of the support received. That being said, management must ensure sufficient disclosure is made in order for users to understand the nature, timing and amount of any significant government support received.

Entities receiving any sort of government support as a result of COVID-19, should reach out to their MNP practitioner to discuss how such funding shall be accounted for.

Furthermore, we recommend entities review their existing insurance policies and reach out to their insurance companies regarding any business interruption insurance that may be available to them and the steps needed to be taken to make a claim. Contingent assets are not recognized in an entity’s financial statements since they may result in the recognition of revenue that may never be realized. However, depending on the likelihood of the future event confirming the existence of the asset, disclosure around the contingent asset may be required.

IFRS: IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, IAS 37 Provisions, Contingent Liabilities and Contingent Assets ASPE & NPO: Section 3290 Contingencies, Section 3800 Government Assistance NPO: Section 4410 Contributions – Revenue Recognition PSAS: PS 3320 Contingent Assets, PS 3410 Government Transfers

Other Estimates The uncertainty arising from the COVID-19 outbreak has created significant estimation uncertainty for entities directly and indirectly impacted by the outbreak. Management must assess the impact the outbreak has had on all its estimates at year-end as well as interim periods, if applicable. In addition to those estimates noted above, management will need to consider the impact on the following:

Inventory valuation and obsolescence

• The net realizable value of inventory may decrease, and obsolescence may increase, as a result of the entity having ceased or limited operations because of COVID-19. Management will need to assess whether a write-down of inventory is required.

• Some entities may not be able to perform a year-end inventory count because of COVID-19. Where this is the case, we suggest management make arrangements to perform the inventory count as soon as practicable after year-end and then rollback quantities to the year-end date based on the purchases and sales of inventory made during that period.

• Manufacturing and/or cannabis companies may have ceased or reduced production as a result of decreased demand for their product, inability to access raw materials or diminished personnel levels because of COVID-19. Fixed overhead costs are required to be allocated to inventories based on the normal capacity of the production facility. The amount of fixed overhead allocated to each unit of production cannot be increased because of low production or an idle plant. Any unallocated overhead should be recognized as an expense in the period in which it is incurred. Management will need to apply judgement when determining whether the fixed costs allocation is based on the normal capacity of the production facility.

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Allowance for doubtful accounts and bad debts/ expected credit losses

• We anticipate these amounts will increase for some entities as a result of COVID-19. Reductions in forecasts in economic growth increases the probability of default across many borrowers. Factors management shall consider in estimating these amounts include, but are not limited to, the customer’s ability to make payments on time (or at all) and customer insolvency, as well as individual and/or corporate borrowers’ particular exposure to the economic impacts in their geographic location and industry.

• Further, the value of collateral may fall as a result of a fall in prices of assets.

• In assessing expected credit losses, entities that apply IFRS 9 Financial Instruments are required to assess whether there is a significant increase in credit risk exposure at each reporting date. In making this assessment, factors such as government programs supporting borrowers and the liquidity constraints of the borrower over the life of the instrument should be considered. The option offered by a lender for a borrower to defer loan payments for a specified period does not automatically trigger the rebuttable presumption in IFRS 9 Financial Instruments that the credit risk of a financial asset has increased significantly since initial recognition when the asset is more than 30 days past due.

Estimates related to revenue contracts

• Many entities may experience decreased sales as a result of COVID-19. Where an entity earns variable consideration on its revenue contracts, management will need to reassess the amount of consideration it expects to be entitled to given the impact of COVID-19 on its customers’ operations.

• Entities may experience a decline in operations as a result of COVID-19. Management will need to consider whether any revisions to the measure of progress are required for revenue that is recognized over time.

• Due to COVID-19, entities may offer new or additional rebates, refunds, discounts or returns on the sale of their products or services which results in variability in the amount of consideration exchanged in a transaction. In recognizing revenue, an entity must estimate the amount of variable consideration it will be entitled to using historical, current and forecast information that is reasonably available, which may be limited for those entities who are only now providing these offers as a result of the virus.

The remaining useful lives of assets and depreciation rates

• The use of certain assets may increase or decrease depending on the impact COVID-19 has on the entity. Management will need to review the useful life of its assets and its depreciation rates to determine if adjustments are needed.

Note! The International Accounting Standards Board (IASB) issued guidance on the

accounting for expected credit losses when applying IFRS 9 Financial Instruments in light of

the current uncertainty resulting from the COVID-19 pandemic. For additional information

please refer here.

https://cdn.ifrs.org/-/media/feature/supporting-implementation/ifrs-9/ifrs-9-ecl-and-coronavirus.pdf?la=en

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Deferred/future income tax assets

• Deferred/future income tax assets may only be recognized if it is probable that taxable income will be available against which the deductible temporary differences can be realized. Given the impact COVID-19 has had on entities’ operations, it may be more difficult to support the probability of realization for some entities, including the estimate of the amount to be realized. This is especially true if there are material uncertainties as to the entity’s ability to continue as a going concern.

Provisions and contingencies

• New provisions or contingencies (e.g., provision for onerous contracts) may need to be recognized/disclosed and existing balances may need to be adjusted, depending on the nature of the entity.

Accruals for trade or other payables

• Some vendors, such as utility companies and banks, are providing their customers with the option to defer payments for a certain period of time. Entities that take advantage of these deferrals will still need to book accruals to recognize these amounts owing as these amounts still meet the definition of a liability.

Asset retirement obligations

• The expected timing of an asset retirement obligation and/or the costs associated with such an obligation may change, depending on the entity’s operations.

Employee benefits

• Employee benefits may change as a result of new policies issued by the provincial and federal governments. This may require the need for new or additional accruals and/or the recognition of new revenues arising from the receipt of government assistance. Refer to the Government Support & Insurance Proceeds section for more information related to the recognition of government assistance.

Employee termination costs

• Accruals for employee termination costs may need to be recognized as a result of the increase in layoffs and contract terminations because of COVID-19. These accruals should be recognized as at the date of the decision, rather than the date of payment.

Stock-compensation arrangements

• Where stock compensation arrangements are based on performance conditions, management will need to assess whether the COVID-19 pandemic has affected the probability of those performance conditions being met. The estimate for the vesting period and/or the amount recognized for goods or services received by the entity’s employees may need to be adjusted if new information indicates that the number of equity instruments expected to vest differs from previous estimates due to failure to satisfy a performance condition.

Leases • The definition of the lease term varies by framework, but generally speaking, the lease term includes the non-cancellable period of the lease together with periods covered by an extension option if reasonably certain that the option will be exercised, and periods covered by a termination option if reasonably certain that the option will not be exercised. The business disruption caused by COVID-19 may impact both the non-cancellable period of a lease and/or the likelihood of the lessee to exercise an extension or termination option. Where the entity’s leasing arrangements are impacted by COVID-19, management will need to reassess and potentially revise the lease term.

• Lease arrangements may be modified as a result of COVID-19 (e.g., reduced or deferred lease payments, lease incentives). Where a lease has been modified, management will need to assess the impact on the financial statement items (i.e., leased assets, lease obligations, lease expense, etc.), in accordance with the relevant accounting framework.

• Assets arising from lease arrangements (e.g., lease assets, lease receivables, etc.) may be impaired as a result of COVID-19. Management will need to assess whether an impairment test is required in accordance with the relevant standard.

• Management will need to consider the impact of COVID-19 on other estimates related to lease arrangements, including, but not limited to, the estimated costs of dismantling and removing a leased asset, guaranteed and unguaranteed residual values, and the stand-alone selling prices

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of lease and non-lease components.

IFRS: The Conceptual Framework for Financial Reporting, IAS 2 Inventories, IAS 12 Income Taxes, IAS 16 Property,

Plant & Equipment, IAS 19 Employee Benefits, IAS 37 Provisions, Contingent Liabilities & Contingent Assets, IAS 38

Intangible Assets, IFRS 2 Share-based Payment, IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with

Customers, IFRS 16 Leases

ASPE & NPO: Section 1000 Financial Statement Concepts, Section 3031 Inventories, Section 3061 Property, Plant &

Equipment, Section 3064 Goodwill & Intangible Assets, Section 3065 Leases, Section 3110 Asset Retirement Obligations,

Section 3290 Contingencies, Section 3400 Revenue, Section 3462 Employee Future Benefits, Section 3465 Income

Taxes, Section 3856 Financial Instruments, Section 3870 Stock-Based Compensation and Other Stock-Based Payments

NPO only: Section 1001 Financial Statements Concepts for Not-for-profit Organizations, Section 3032 Inventories Held

by Not-for-profit Organizations, Section 4410 Contributions – Revenue Recognition, Section 4420 Contributions

Receivable, Section 4433 Tangible Capital Assets Held by Not-for-profit Organizations, Section 4434 Intangible Assets

Held by Not-for-profit Organization

PSAS: PS 1000 Financial Statement Concepts, PS 3150 Tangible Capital Assets, PS 3250 Retirement Benefits, PS 3255

Post-employment Benefits, Compensated Absences and Termination Benefits, PS 3260 Liability for Contaminated Sites,

PS 3300 Contingent Liabilities, PS 3320 Contingent Assets, PS 3400 Revenue, PS 3450 Financial Instruments, PSG-2

Leased Tangible Capital Assets

PSAS for Not-for-profit Organizations: PS 4210 Contributions – Revenue Recognition, PS 4220 Contributions

Receivable, PS 4230 Capital Assets Held by Not-for-profit Organizations

Presentation & Disclosure Requirements Given the COVID-19 outbreak, it is important that management pay extra attention to the relevant disclosure requirements as the outbreak may result in additional disclosures that management has generally not included in the past. Furthermore, the level and detail of disclosure will largely depend on the impact to the entity’s operations. Disclosures should be specific and avoid boiler-plate language. While the disclosure requirements of the accounting frameworks vary significantly, examples of some disclosures that may be required include:

Note! The IASB is working on a project to provide practical relief to lessees in accounting for

rent concessions arising as a result of the COVID-19 pandemic. The IASB has tentatively

decided to provide lessees with an optional exemption from assessing whether a COVID-19-

related rent concession is a lease modification and account for those rent concessions as if

they were not lease modifications. More information regarding the practical relief and the

effective date of this practical relief is expected to be issued by the IASB by April 27, 2020.

Note! Disclosure over an entity’s estimates is important. Management shall refer to the requirements of the relevant

standard to ensure sufficient disclosure has been provided. Boiler-plate language or blanket disclosure regarding

measurement uncertainty, significant estimates and significant judgements, although never appropriate, will

certainly not be sufficient given the state of the economy. Management must ensure that disclosure is specific to the

estimate as well as the entity’s situation.

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• Nature of the entity’s operations o The nature of the entity’s operations may have changed as a result of COVID-19. This disclosure should be

updated for the impact of COVID-19, including information regarding any business closure, leaves of absence, change in operations such as a change in the types of products or services offered, etc.

• Material judgements and uncertainties facing the entity including: o The nature and extent of measurement/estimation uncertainty about financial statement items including any

changes made to past assumptions if that uncertainty remains unresolved o The sensitivity of assets and liabilities measured at fair value to the methods, assumptions and estimates

used in their calculation, and the reason for the sensitivity

• Risk disclosures o The nature and extent of business risks arising from COVID-19 (e.g., market risk, credit risk, liquidity risk,

etc.), including the effects on: ▪ Suppliers or logistic providers ▪ Product/service demand (both directly and indirectly) and impact on credit risk based on customers’

ability to pay ▪ Planned or existing expansions and investments

o Mitigating actions that may be taken to address those business risks o Information about concentrations of risk that arise from financial instruments that have similar characteristics

and are affected similarly by changes in economic or other conditions o Sensitivity analysis for major risk exposures

For entities that prepare interim financial statements, management will also need to consider the disclosure requirements of their relevant reporting framework. Entities are not required to disclose information that was already included in the year-end financial statements. Given the extent of the impact of COVID-19 may not have been known to the entity at their year-end, additional disclosures will likely be required in interim periods. Examples of disclosures that may be required, specifically for interim periods, include but are not limited to:

• Information regarding events and transactions that are significant to an understanding of the changes in the financial position and performance of the entity since the end of the last annual reporting period, including:

o Write-down of inventories o Recognition of losses from the impairment of assets o Changes in the business or economic circumstances that affect the fair value of the entity’s financial assets

and liabilities o Changes in contingent liabilities/assets or accruals for new liabilities incurred o Acquisition/disposal of property, plant and equipment o Loan defaults or breach of loan agreements o Delays in planned acquisitions or other significant transactions

• Events after the interim period that have not been reflected in the financial statements of the interim period.

Note! The impact of COVID-19 may be exacerbated for entities with concentrations, particularly with/in a:

• Specific market

• Certain customer (or customer base)

• Specific supplier

• Particular product or service

• Geographic location It is important that management consider the types of concentrations the entity has and the impact these concentrations may have on the entity, particularly when disclosing both the concentration risks of the entity as well as the assumptions it is making about the future, and other major sources of estimation uncertainty that may affect the carrying amounts of assets and liabilities.

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• Changes to, or the existence of new, accounting policies since year-end due to changes in the entity’s operations, provision of free services, extension of terms of original contracts, etc.

• Changes in accounting estimates due to adjustments of the carrying amount of assets and/or liabilities, or the amount of the periodic consumption of an asset, resulting from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities. Given the uncertainties inherent in business activities in general as well as those arising due to the COVID-19 pandemic, judgements based on the latest available, reliable information may require a change in estimate for:

o Bad debts o Inventory obsolescence o Fair value of financial assets or liabilities o Useful lives of, or expected pattern of consumption of the future economic benefits embodied in, depreciable

assets COVID-19 may result in an entity earning revenue (e.g., revenue generated from the sale of new and unrelated products to its original business, such as hand sanitizer or medical equipment) or incurring expenses that are not part of its normal day-to-day operations (e.g., costs related to safety equipment for personnel), which are considered extraordinary. While the Canadian accounting frameworks no longer permit presentation of an item as ‘extraordinary’, they do allow for the following:

• IFRS - Separate disclosure of individual items, either on the face of the financial statements or within the notes, when they are material.

• ASPE – Separate disclosure of revenue, expenses, gains or losses resulting from transactions or events that are not expected to occur frequently over several years, or do not constitute normal business activities of the entity, either on the face of the financial statements or within the notes.

Management will need to review the relevant presentation and disclosure requirements and consider the nature of the revenue and expenses to determine the appropriate presentation and/or disclosure within the financial statements. Although not part of an entity’s “normal” business operations, it may still be more appropriate to recognize certain revenue and expenses as part of the operating income and operating expenses if they directly relate to the entity’s operations vs. other income and other expenses. Presentation and disclosure checklists for ASPE, NPO and PSAS are available through the MNP Financial Reporting Library (https://www.mnp.ca/en/assurance-accounting/financial-reporting-library).

IFRS: IAS 1 Presentation of Financial Statements, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, IAS 34 Interim Reporting Periods , IFRS 7 Financial Instruments: Disclosures, IFRS 9 Financial Instruments, IFRS 13 Fair Value Measurement ASPE: Section 1400 General Standards of Financial Statement Presentation, Section 1505 Disclosure of Accounting Policies, Section 1506 Accounting Changes, Section 1508 Measurement Uncertainty, Section 1520 Income Statement, Section 3856 Financial Instruments NPO only: Section 1401 General Standards of Financial Statement Presentation for Not-for-profit Organizations PSAS: PS 1202 Financial Statement Presentation, PS 2100 Disclosure of Accounting Policies, PS 2120 Accounting Changes, PS 2130 Measurement Uncertainty, PS 3450 Financial Instruments PSAS for Not-for-profit Organizations: PS 4200 Financial Statement Presentation by Not-for-profit Organizations

Note! When determining whether a disclosure should be added, the entity should consider whether the information is material and would reasonably be expected to have a significant effect on a financial statement user’s decision, the entity’s market price or value of the entity, etc. Furthermore, publicly listed entities shall monitor for additional disclosure requirements pertaining to the COVID-19 outbreak, which may be dictated by their relevant exchange/regulator.

https://www.mnp.ca/en/assurance-accounting/financial-reporting-library



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Impact on Lending Agreements and Other Contracts Entities impacted by COVID-19 may be at increased risk of violating bank and lending covenants, an inability to make loan repayments, insolvency, or potential default triggers in financing arrangements or other contracts as a result of their financial results.

Where the terms of lending agreements or other contracts are amended, or reliefs are provided, by either the entity or the counterparty as a result of COVID-19 (e.g., free or discounted services, revised interest rates, delayed payment terms, removal of foreclosure clauses, etc.), management will need to assess the impact on the entity’s financial statements. Depending on the nature of the amendment, the following could be impacted:

• The entity’s accounting policies

• Revenue and receivables, including allowance for doubtful accounts and expected credit losses

• Impairment loss provisions

• Related disclosures

• Risk exposure It is important that management review and have a thorough understanding of all its contracts/agreements, lending or otherwise, in order to assess the impact COVID-19 may have on the entity. For example, there may be clauses within an entity’s contracts (e.g., force majeure) that may limit the liability of either party to the contract for defaults arising from the pandemic.

Filing Requirements or Reporting Deadlines With the closure of many businesses, management may struggle to meet filing or other deadlines set by regulators or lenders. We recommend that where management anticipates they may struggle to meet these deadlines, they reach out to these parties to discuss this fact and whether alternative arrangements can be made. Furthermore, we encourage entities that have deadlines that are still a few months out to begin communicating with their regulators, lenders, etc. now, in order to evaluate what options are available and ensure lines of communication are open.

Note! We highly recommend that where management anticipates the entity will be financially impacted by COVID-19, they reach out to their lenders and relevant counterparties now to discuss these potential risks as well as discuss whether alternative arrangements can be made in consideration of the current environment.

Note! The Canadian Securities Administrators is providing temporary blanket relief measures as a result of the challenges entities are facing because of the COVID-19 pandemic. The blanket relief provides 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 as well as for certain other requirements. Please refer to the CSA website for additional guidance.

https://www.osc.gov.on.ca/en/NewsEvents_notices-newsreleases_index.htm

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100% Made in Canada. Why is this important? Because it defines who we are and our approach to business. It has helped shape our values, our collaborative approach and the way we work with our clients, engaging them every step of the way. Our history gives us a unique perspective. We know Canada because we are a part of Canada. All of our decisions are made here – decisions that drive Canadian business and help us all further achieve success. And the sense of strong Canadian commitment, being a part of every community we live and work in, and always being there through prosperous and challenging times. Being 100% Canadian is something we wear proudly because we know the great opportunities that exist here. The opportunities that have been afforded to our firm, the same opportunities that we deliver to our clients.

ABOUT MNP MNP is a leading national accounting, tax and business consulting firm in Canada. We proudly serve and respond to the needs of our clients in the public, private and not-for-profit sectors. Through partner-led engagements, we provide a collaborative, cost-effective approach to doing business and personalized strategies to help organizations succeed across the country and around the world.

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Documents

Accounting Considerations Related to the COVID-19 Outbreak 03 CO… · Accounting Considerations Related to the COVID-19 Outbreak This communication contains a general overview of