Impacts on accounting - value clarification versus value justification

The German Institute of Auditors has published an article gathering the consequences of the coronavirus on the financial reporting as of 31.12.2019. We have summarised what you need to bear in mind.

• With regard to possible effects by the new Coronavirus (Covid-19) on financial reporting according to German Commercial Code as of the reporting date 31 December, 2019, the decisive factor is the extent to which the outbreak can be classified as a value-clarifying or value-justifying fact. 
• The difficulty regarding the classification (value-justifying versus value-clarifying) lies in the fact that the spread of Covid-19 is not restricted to a certain moment but represents a continuous process.
• First cases of infections were known in December 2019, however, according to today‘s knowledge, they were regionally restricted. A sudden spread of the infection with economic consequences (closure of plants and impairments of supply chains and sales processes) only occurred as of January 2020.   
• In the opinion of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer / IDW), it can be assumed that the developments around Covid-19 are to be classified as a global threat as value justifying and thus the outbreak of Covid-19 causally occurs in 2020.   
• Pursuant to Sec. 285 No. 33 German Commercial Code (Handelsgesetzbuch / HGB), the financial statements up to 31 December, 2019 require post-balance sheet reporting and an assessment in the (consolidated) management report for the financial years ending on 31 December, 2019.
• A significant exception results if the going concern assumption underlying the preparation of the financial statements can no longer be maintained. In this case, the financial statements as of 31 December, 2019 have to be prepared no longer under the going concern assumption, even if the causal event only occurred in the new financial year. 

Indication of risks in the (consolidated) management report

• Besides the post-balance sheet reporting in the notes to the financial statements pursuant to Sec. 285 No. 33 German Commercial Code (HGB), a presentation of the risks in the (consolidated) management report for the financial year 2019 is required. 
• The risk report should be particularly mentioned with reference to the development around the Covid-19 as relevant risk factor regarding the achievement of forecasts or corporate objectives.