Standalone financial statements
The IDW issued a guidance notice on the treatment of the Corona crisis in financial statements ending 31 December 2019 which can be found on the IDW Homepage. The guidance notice also explains whether the crisis is a topic of “Wertaufhellung” or “Wertbegründung” in accordance with German GAAP (“HGB”): Even though the virus started to spread in 2019, the real cause of the crisis (e.g. closure of public life) only started in 2020 (opinion of the IDW in most of the cases). Therefore, the crisis is an example for “Wertbegründung” meaning that the cause lies in 2020 and does not need to be reflected in the 2019 financial statements.
Under IFRS the terms “adjusting events” and “non-adjusting events” are used to assess whether the amounts recognized in its financial statements need to be adjusted subsequently to the reporting period. In general, IFRS follows the same principles as under German GAAP to evaluate whether an event impacts the “conditions” of valuation at year end.
The crisis might however be mentioned as “subsequent event” under German GAAP and IFRS in the notes of the 2019 financial statements, depending on the relevance for the respective company.
For IFRS financial statements, an additional estimate of the financial impact is required (or a statement, that it is not possible to estimate).
Consolidated financial statements
Under German GAAP, subsidiaries do not need to be included in the consolidation perimeter, if the effort would be too high or too costly or financial information might not be available at all (e.g. if the accounting team of a subsidiary is not available due to the Corona crisis). This option needs to be described in the notes, IFRS does not have a similar ruling/option.
The Corona crisis however should in most of the cases be part of the management report (“Lagebericht”).
Eight Advisory Germany’s view on a financial due diligence of 2019 financial statements
When analyzing 2019 financial statements as part of your due diligence exercise, the impact on the financial performance or financial situation (profit and loss and balance sheet analysis) will be limited, as the impact of the Corona crisis lies in 2020 and, hence, will only be reflected in the current year. The guidance above however might help to find additional information how the crisis will impact the company’s financial statements in the current or subsequent year.
It, however, also means that for potential bankruptcies no provisions will be set up as at 31 December 2019 for potentially affected trade receivables. The aging analysis of trade receivables will therefore become an even more important part of each due diligence.
If you have any questions on the above, feel free to reach out to experts of Eight Advisory Germany.
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