COVID-19 Effects on Private Enterprise Financial Statements
COVID-19 and related government measures (including shutdowns, restrictions, and protective measures) are having significant impacts on Canadian companies. CPA Canada issued an alert in March, 2020 to discuss Accounting Standards for Private Enterprises (ASPE), which are small and medium-sized companies that do not report their financial results publicly and their shares are not traded on a public stock exchange.
The CPA Canada alert was for management to provide sufficient information on their private enterprise financial statements (including notes) with December 31, 2019 year-ends, when very few COVID-19 impacts were reported in Canada. Management disclosure of post December 31, 2019 COVID-19 events is required up to the date of approval of the financial statements by the directors or authorized parties, referred to as subsequent event disclosure. At a minimum, management needs to describe the significance of COVID-19 effects on the company and estimate its financial impact if practicable or provide a statement that such an estimate cannot be made.
Financial statements (income statement and balance sheet) for private companies with post December 31, 2019 year-ends, such as March 31, 2020, will likely need to be adjusted for significant changes to assets and liabilities, and any other accounting adjustments due to impacts of COVID-19. Management will also need to make estimates of subsequent event disclosure up to date of financial statement completion (i.e. date of approval by directors or authorized parties) for additional events related to COVID-19, such as new government regulations, significant contract cancellations, closure of operations, and employee layoffs. If specific impact estimates are not possible, then management should consider providing range of impacts or a qualitative discussion.
Management must also disclose in a note in their financial statements if it has significant doubt as to its ability to continue operating on a going concern basis. This determination needs to be based on company-specific circumstances and will require significant judgement. Management needs to work closely with their external auditor when making this determination. The auditor needs to evaluate management’s going concern assessment in his or her audit report, and ensure it was based on all relevant information, including management’s recent strategic decisions.
The basis for management’s going concern assessment may require more attention by the external auditor in the current COVID-19 environment than in previous years. The external auditor needs to draw attention to management’s going concern note in his or her audit report, and understand management’s business strategies, decisions and challenges.
The external auditor may need to express a qualified or adverse opinion in his or her audit report, if management’s disclosure is not adequate.
Should you have any questions or concerns about this issue, please contact your accountant or external auditor for additional information. If you do not presently have an accountant or auditor, K & E Professional Accounting Associates can help. Please go to our “schedule an appointment calendar” to set up your appointment with one of our specialists.