Accounting Implications of COVID-19

A nationwide lockdown came into effect from 27 March as a result of the COVID-19 crisis. The effect of the lockdown and the ongoing crisis means that the economy will experience a significant downturn, while there will be an increased need for government services and assistance. The volatility in interest rates may also negatively affect entities.

Areas that could be affected as a result of the crisis include the following:

• Construction, maintenance and related activities may be curtailed depending on whether they are seen as essential. This could impact the completion of entities’ capital projects and planned maintenance.
• Public facilities may be not be operational and certain services may not be provided as a result of the lockdown (and beyond). This could impact the revenue of entities as well as the ongoing demand for services.
• There may be an increased demand for government:
• Services such as medical services, the provision of water and other sanitation services, and the provision of temporary housing or accommodation.
• Assistance and support to the unemployed, businesses that are temporarily closed, NGOs, etc. due to the reduced activity in the economy.
• As some consumers of services and taxpayers may be unable to work or earn revenue during the lockdown period, there is a potential increase in the non-payment for services such as water, electricity, property taxes, levies, etc. that are due to government entities.

While it is impossible to provide accounting guidance for all the implications related to the COVID-19 crisis, the Secretariat of the ASB has published a document outlining the high-level issues that entities that apply Standards of GRAP should consider in preparing their financial statements for 31 March 2020 or 30 June 2020. The document can be accessed by following this link: https://www.asb.co.za/covid-19/ The key themes from that document are outlined below.

Presentation and disclosure in the financial statements

Entities should consider reviewing the following:

• Accounting policies should be reviewed to ensure that they are still relevant. In particular, attention should be given to whether the classification of assets and liabilities, the valuation methodology applied, and inputs into the valuation methodology are appropriate.
• Presentation of items in the financial statements. Items that are material – either qualitatively or quantitatively - should be presented separately in the financial statements. Certain items relating to COVID-19 may be material and require separate presentation or disclosure in the financial statements. In making these disclosures, it is important that entities still apply the classification approaches to revenue and expenses outlined in GRAP 1 on Presentation of Financial Statements.
• Disclosures on judgements, assumptions, estimates and uncertainties. Entities are required to provide information where judgement, assumptions, and estimation uncertainty were applied in the preparation of the financial statements. This is an area where entities have historically provided either no, or poor, information. Given the uncertain environment within which entities will be preparing their financial statements, there is an increased need to provide this type of information to users of the financial statements.
• Events after the reporting date. A key issue that entities will need to consider is how to deal with events that occur after the reporting date in GRAP 14 on Events After the Reporting Date. Entities adjust the amounts recognised or disclosed in the financial statements for events that provide evidence of conditions that existed at the reporting date. Entities do not adjust the financial statements for events that arise after the reporting date but could disclose such events, if material.
• Legislative reporting requirements. Entities should consider whether any legislative reporting requirements apply, for example, disclosure on losses incurred.

As a reminder, entities should include all information in the financial statements that is relevant to the users of the financial statements. This could include information that is not specifically required by a Standard of GRAP.

Existence of liabilities

A consequence of the increased need for government services and government assistance is the potential for increased expenses. The key consideration in accounting for the increased services and assistance is whether an obligation exists. Government may make promises and commitments to undertake certain activities or provide support, but until there is a clear past event that has occurred (through a contract, legislation or past practice) that means that there is no realistic alternative but to settle the obligation, there is no liability and no related expense.
There are many Standards that deal with accounting for liabilities. Entities determine the nature of any additional liabilities that should be recognised and/or disclosed, or whether the measurement of existing liabilities should be changed, based on the following Standards: financial liabilities in GRAP 104 on Financial Instruments, lease liabilities in GRAP 13 on Leases, accruals and provisions in GRAP 19 on Provisions, Contingent Liabilities and Contingent Assets, and liabilities related to employee benefits in GRAP 25 on Employee Benefits.
Particular attention should be given to recognising and/or disclosing information about financial and other guarantee contracts issued by an entity. GRAP 19 should be applied in these instances.

Measurement of assets

Non-monetary assets
Non-monetary assets include inventories, investment properties, items of property, plant and equipment, intangible assets, biological assets or agricultural produce, and heritage assets.
The impact of the COVID-19 crisis is most likely to affect the valuation of non-monetary assets at  reporting date. As most non-monetary assets are measured either at cost less impairment and/or depreciation/amortisation or using a revaluation model or fair value, entities should consider the following potential implications on their valuation:

• Depreciation/amortisation – Assess if there is any indication that there has been a change in expected useful life, for example, because of a change in how an asset is used, its utilisation rate, delays in carrying out maintenance, or changes in the condition of the asset.
• Impairment – Assess whether there are indications that its assets are impaired, for example, because of long-term changes in the use of the asset, decisions to stop the construction of an asset, or physical damage.
• Valuation at reporting date – Given the economic environment, it is likely that there will be revisions to the fair values of assets. The valuation methodology used may need to be modified based on the availability of information, along with considering whether the inputs into the valuation methodology need to be revised.

Monetary assets
Monetary assets include financial assets in GRAP 104, lease receivables in GRAP 13, plan assets in GRAP 25, and statutory receivables in GRAP 108 on Statutory Receivables. 
As with non-monetary assets, a key consideration for entities will be the valuation at reporting date. Where assets are measured at amortised cost, cost or using the cost method, it should be considered whether there is any indication that an impairment loss has been incurred on these assets. Due to the economic impact of the COVID-19 crisis on consumers, taxpayers and businesses, there is a high likelihood that there is observable evidence of an impairment loss, for example, default on the payment terms agreed, or financial difficulty of the counterparty.
Particular attention should be given to accounting for assistance given to others as concessionary loans.

The impact of COVID-19 on legal compliance by public entities and municipalities

Given the COVID-19 lockdown, the Ministers of Finance and Co-operative Governance and Traditional Affairs have issued regulations regarding the application of the Public Finance Management Act (Act No. 1 of 1999, as amended) (PFMA) and Municipal Finance Management Act (Act No. 56 of 2003) (MFMA). The details of the Gazettes are as follows:

• Gazette No. 43181 and No. 43184 issued on 30 March 2020 for the MFMA.
• Gazette No. 43188 issued on 31 March 2020 for the PFMA.

Due to the extension of the lockdown period, the submission of financial statements for PFMA entities has been extended by two months.