| Issue |
Reporting and management implications |
| Going concern |
When assessing whether the entity remains a going concern, projections for the 12 months from the date when the financial statements will be signed will likely need to take into account more pessimistic scenarios than have been used in the past. Many entities are likely to see reduced donations, the loss of corporate sponsors, cancelled or scaled back fundraising events and reduced investment returns. The forecasting process will require an in-depth examination of each promised and projected revenue source to determine whether receipt to the level previously anticipated remains likely. |
| Key judgements and estimates |
Where disclosure of key judgements and estimates is required in the financial statements, disclosures used in previous years may no longer be adequate. The uncertainties created by COVID-19 are likely to require extensive disclosure, particularly where they have resulted in changes to key judgements or estimates. |
| Investment income |
For those not-for-profit entities that rely on investment income, historically low interest rates, and the likelihood of reduced dividend income, may mean that the entity’s investment strategy and/or its budgets need to be revised. |
| Trading income |
Where a not-for-profit entity earns revenue from performing services on a commercial basis, lockdowns and social distancing requirements may have resulted in agreed timeframes not being met, which may result in the imposition of penalties or the non-receipt of bonuses. In addition, impairment of trade receivables from the provision of services or the sale of goods may be greater than in prior periods. |
| Wage subsidies |
Where an entity has received New Zealand Government wage subsidies, those subsidies should be recognised as a liability when received and then recognised as revenue/income (with the liability being extinguished) as wages/salaries are paid. |
| Capitalised costs |
Where expenditure has been capitalised to assets, write-offs may be required - for example, prepayments on venue hire for an event that is cancelled will need to be written-off. |
| Closure of operations |
Where some operations have been reduced, there may be onerous leases, onerous contracts and/or restructuring costs. In determining the amount to recognise for an onerous lease/contract, the lowest cost available alternative must be used. Restructuring costs can only be recognised when a constructive obligation exists (due to, for example, having notified affected parties of the entity’s intentions). |
| Non-financial assets carried at cost |
Where items of property, plant and equipment, investment properties and intangible assets with finite useful lives are carried under the cost model, they must be assessed for impairment indicators annually (and then impairment tested where impairment indicators exist). Under normal circumstances, reviews of impairment indicators often require limited judgement, because the asset is functioning as intended and there have not been factors external to the entity that suggest that the asset may not be able to be used as intended. However, the impacts of COVID-19 have been so substantial and so widespread that assessments of impairment indicators will need to be more detailed and wide-ranging than they have been in the past. In many instances, impairment indicators will be detected for the first time and impairment testing will be required. When undertaking impairment testing, if forecast cashflows are being used, realistic assumptions about future revenue streams must be used. |
| Revalued non-financial assets |
Where non-financial assets are carried under a revaluation model, downwards revaluations may need to be recognised. Valuation reports will require careful examination to determine whether the impacts of COVID-19 have been appropriately factored into the valuation. In some instances, valuers will have included additional disclaimers in relation to uncertainties created by COVID-19 – where such disclaimers have been included, consideration will need to be given to the reliability of the valuation and the disclosures that should be provided in the financial statements. |
| Loan covenants or funding conditions |
Where asset values have decreased, or projected cash inflows have been reduced, compliance with loan covenants or funding conditions might be impacted. Entities should notify lenders or funders of potential breaches as soon as possible, so that terms can, if possible, be renegotiated. |
| Disclosure |
As COVID-19 has had, and continues to have, substantial and wide-ranging impacts on the local and global economies, for most entities substantial disclosure of COVID-19 impacts to date, and projected future impacts, will be required. The most effective way to do this is likely to be including a detailed COVID-19 note early in the notes section of the financial statements and then cross referencing to other notes to avoid repetition. Even where COVID-19 has had, and will continue to have, limited impacts on an entity, stating and explaining that in the financial statements will likely provide useful information to users of the financial statements. |