Planning for the 20/21 financial statements

All reporting seasons are normally faced by companies with an element of dread, however this reporting season brings some additional challenges. Covid 19, Brexit, climate change reporting requirements for some companies, new auditing standards around going concern and estimates all combining into a perfect storm alongside another lockdown.

Below are some areas to consider and prepare for ahead of, or as part of, your financial statements drafting and audit.

Accounting standards

Whilst there are no new major standards in either International or UK GAAP for 31 December 2020 year ends, there are a few accounting areas to consider:

  • Rent concessions: in light of Covid 19 and rent concessions granted to some businesses, both UK GAAP and IFRS standards have been amended to provide guidance and optional exemptions. The amendments currently apply to rent concessions up to 30 June 2021, though may be extended
  • Accounting for government grants: access to government grants such as the Job Retention Scheme may require Companies to consider an accounting policy for grants for the first time. Disclosure of the accounting policy and the amounts received are required if material.
  • Changes to financing: New sources of finance (including CBILs accounting), changes to current financing agreements or covenant breaches and waivers may have occurred and require associated debt modification accounting and / or disclosures.
  • Revenue: various changes to customer contracts may have occurred as a result of the pandemic, or alternative business models may have been introduced. These changes may require a revision to accounting policies, or in some cases contract modifications and changes to performance obligations to be accounted for

Focus areas

Other areas, where there may not be a change but likely to see increased focus are:

  • Recoverability of debts: payment terms may have been extended, providing financing to customers, and assessment of recoverability may also be impacted, leading to changes to expected credit loss/ bad debt provisions
  • Impairment testing of non-financial assets: there are likely to have been a number of impairment indicators over the past 12 months, leading to additional focus on impairment tests being performed around goodwill, intangible and tangible assets. Changes to business models and use of assets may also impact on the make up of cash generating units
  • Restructuring plans and onerous contracts: when to recognise the associated costs as well as determining a reliable estimate of provisions required
  • Insurance recoveries: as companies gain further clarity over insurance payments for loss of business, consideration will be required as to when the reimbursement / funds can be recognised
  • Share based payment plans: trading during the pandemic may have impacted the probability that vesting conditions will be met, whether the options are still ‘in the money’, or have led to modifications of schemes impacting on the ongoing accounting / amounts recognised

 

New auditing standards

New auditing standards, are also likely to affect the amount of work required by finance teams in respect of the year end audit:

  • Going concern: the new auditing standard requires an assessment to be made by management on the appropriateness of the going concern basis of preparation, considering a period of at least 12 months from the date of signing the accounts, which is documented, takes account of potential downside scenarios and is board approved
  • Significant estimates: expanded audit requirements to assess the appropriateness of estimates have been introduced which will lead to further challenge from your auditors around the calculation of the estimate and supporting evidence / documentation
  • Audit report changes: There may be increased emphasis on fraud risks of the company and compliance with laws and regulations

 

Additional considerations

The financial statements provide the business with an opportunity to tell its story and provide further information to stakeholders.  Key for the 20/21 reporting season will be telling the story of the year and what has happened up until the date of signing.  There is also continued focus on s172 statements following their introduction last year and new requirements around carbon reporting and the effects of climate changes for large companies. In the second year of disclosure, companies will be required to show some form of comparability and hopefully, highlighting their contribution to improving their impact on the environment across the last 12 months.

 

If you require any assistance to help prepare or deal with your 20/21 year end reporting or would like more information on any of the above  please do get in touch by emailing support@garbutt-elliott.co.uk