Keeping pace with change: The latest developments in financial reporting for private companies Financial Reporting Development session for private companies September 30, 2020
The latest updates and COVID-19 implications on 1. Accounting Standards for Private Enterprises (ASPE) agenda Adam Rybinski A Canadian tax update 2. Ameer Abdulla Recent developments in transactions and capital markets 3. Today’s Eric Heutschi and Bill Wu More on return to office: Workforce transformation 4. Juliet Nicol Page 2
The latest updates and COVID-19 implications on Accounting Standards for Private Enterprises (ASPE) Presented by Adam Rybinski National Professional Practice Leader, EY Private
Agenda Events after the reporting period Accounting for rent concessions 1. 10. Going concern Government measures – Canada 2. 11. Debt classification Other accounting considerations 3. 12. Fair value measurement Termination benefits 4. • Financial instruments Discontinued operations 5. • Impairment assessment Assets held for sale classifications or changes to a plan 6. • Onerous contracts Deferral of upcoming ASPE standards 7. • Government assistance Other disclosure requirements 8. 13. Income taxes Resources 9. 14. Page 4
Events after the reporting period
Events after the reporting period As it relates to entities that are affected by COVID-19 or the measures taken by governments, ASPE 3820 Subsequent events ► makes a distinction between adjusting and non-adjusting events based on whether the event provides evidence of conditions that existed at the reporting date Management will need to apply judgment in critically evaluating what event in the series of events provides evidence of the ► condition that existed at the reporting date Although the COVID-19 outbreak occurred at a time close to 31 December 2019, for many entities most of the impact on their ► business operations, assets and liabilities may not have been a direct consequence of outbreak, but a result of the government measures taken to contain it, which may have occurred after the reporting date Therefore, for 31 December 2019 year ends we believe that any impact caused by COVID-19 (i.e. impairment of ► financial and non-financial assets) should be considered a non-adjusting subsequent event and should not be reflected in the 31 December 2019 financial statements We also believe that, in most cases, disclosure of such determination should be explained in the financial statements, ► particularly in cases where the impact of the COVID-19 outbreak will be material Additionally, disclosure might be required if it is determined that such non-adjusting subsequent events could cause ► significant changes to assets or liabilities in the subsequent period or will, or may, have a significant effect on the future operations of the entity Page 6
Events after the reporting period (continued) Further consideration will need to be given to entities with year ends ending after 15 March 2020 where subsequent events may be ► more likely to be considered adjusting events The one exception to COVID-19 being considered a non-adjusting subsequent event that teams should be aware of, however, relates ► to the going concern assessment in which management must take into account all available information about the future which is at least 12 months from the end of the reporting period (refer to Going concern considerations below for more information) Page 7
Going concern considerations
Going concern considerations Section 1400 General standards of financial statement presentation requires management to ► make an assessment of an entity’s ability to continue as a going concern When management is aware of material uncertaintiesrelated to events or conditions that may ► cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties In making their going concern assessment, management takes into account all available ► information about the future which is at least 12 months from the end of the reporting period; the assessment needs to be performed up to the date on which the financial statements are issued Management will need to consider both the existing and anticipated effects of the outbreak ► The degree of consideration required and Given the unpredictability of the potential impact, material uncertainties may need to be ► required level of disclosure will depend on disclosed facts and circumstances in each case, as not all entities will be affected in the same manner and to the same extent Management may also need to assess whether significant judgment ► disclosure is required where it has been determined that material Significant judgment and continual updates to assessments up to the date of financial uncertainty does not exist, but the conclusion was subject to significant statement issuance may be required given the judgment evolving nature of the outbreak and uncertainties involved Page 9
Going concern considerations (continued) For entities affected by the COVID-19 outbreak, management will need to prepare the following information: ► Updated financial forecasts for a period of not less than 12 months after the balance sheet date, when it is ► determined that management’s previous financial forecasts are not longer reasonable given current circumstances; Updated sensitivity analysis; ► Forecast of compliance with banking covenants; and ► Any other information available up to the date the financial statements are issued ► Page 10
Debt classification considerations
Current and non-current classification of liabilities and covenant breaches Instability in the markets and disruptions to cash flows as a result of the impact of the coronavirus may increase the risk of breach ► of financial covenants Entities and engagement teams should consider how such breaches impact the timing of repayment of the related liabilities (for ► example, it becomes due on demand) and the impact on the classification of such liabilities at the reporting date Where a breach occurs on or before the end of the reporting period and the breach provides the lender with the right to demand ► repayment within 12 months of the reporting date, the liability should be classified as current unless: The creditor has waived, in writing, or subsequently lost, the right to demand payment for more than one year from ► the end of the reporting period; or The debt agreement contains a grace period during which the entity many cure the violation and contractual ► arrangements have been made that ensure the violation will be cured within the grace period; and A violation of the debt covenant giving the creditor the right to demand repayment at a future compliance date ► within one year of the reporting period is not likely Of note: in a situation where a waiver is obtained for a year-end covenant violation, entities will need to ensure that ► the waiver considers any future covenant violations over that same 12 month period (for example, future quarterly covenant calculations) Page 12
Current and non-current classification of liabilities and covenant breaches (continued) Consideration of the existence and impact of cross-default provisions within arrangements should be evaluated to determine if ► additional waivers would be needed As well, entities will need to consider the impact on disclosure of any guarantees provided by the entity to other entities (often part ► of a related group of entities) under AcG-14 Disclosure of guarantees Additionally, violations subsequent to the reporting period could also affect the entity’s ability to continue as a going con cern ► Page 13
Fair value measurement considerations
Principles of fair value measurement (“FVM”) Under ASPE, fair value is defined as the amount of consideration that would be agreed upon in an arm’s length transaction bet ween ► knowledgeable, willing parties (or market participants) who are under no compulsion to act, taking into consideration the specific facts and circumstances at the reporting date Underlying the definition of FVM is a presumption that an entity is a going concern. Therefore, FVM is not the amount that an entity ► would receive or pay in a forced transaction, involuntary liquidation, or distress sale Market participant assumptions consider all available information, including information that may be obtained through due ► diligence efforts Events or transactions occurring after the reporting datemay provide insight into the assumptions used in estimating fair value, ► however, they are only adjusted for in FVM if: They provide additional evidence of conditions that existed at the measurement date; and ► Provide evidence of conditions that were known, or knowable, by market participants ► Page 15
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