Facing new challenges in the capital market

Accounting and reporting considerations due to COVID-19

The impact of the current uncertainty on business is complex. Adequately reflecting the impact on periodic financial statements is a key element of communications to stakeholders. For listed companies, for which capital market rules have not been relaxed, it is important to maintain compliance with regulations and consider the need for additional communication.

You might find yourself in a similar situation.

To help you, we have created an overview of scenarios, suggested activities and guiding questions for responding to the crisis and recovering the business. As the progress of COVID-19 is hard to predict you might find your business switching between these two phases.

Companies may need to consider implications relating to financing and make decisions about planned market transactions. While being confronted with additional complexity and requirements, they may also face resource constraints due to illness, regulations preventing employees from commuting to work and an insufficient infrastructure to support a remote workforce. We have summarised below some of the potential main challenges and actions to overcome them.

Key questions to consider

There are a number of areas that may be affected. Here are some questions for you to consider:

Is additional communication to stakeholders required, for example as a result of capital market rules?
How can you ensure that you have captured the full impact of the current situation on financial statements and KPIs?
How can you best maintain your IPO readiness for when the market situation stabilises?
How can you best assess the potential impact on (re-)financing, and be best prepared for a discussion with lenders?
How can you manage resource constraints to avoid any delays in reporting, and/or to maintain IPO readiness?

Challenges to address

Observations suggest the following areas could be affected by COVID-19.

	Complex financial reporting topics	Debt & liquidity considerations	Capital market transactions	Compliance with capital market rules	Resource constraints
Description	The impact on financial reporting due to customer, supplier or workforce disruptions and/or idle capacity will be wide-reaching.	Potential discussion with lenders about covenants and liquidity. Change in interest rate may result in re-financing through debt-buy-back, derivatives or rights offering.	Current market conditions do not provide the foundation for a successful IPO market, though there are examples of successful listings during economic downturns.	For public companies, there is the need to ensure compliance with rules and regulations, as well as a need for additional communications.	Workforce disruption may be exacerbated by the additional analysis required of complex accounting issues caused by economic uncertainty, and lack of relaxation of regulatory deadlines.
Action	Timely and appropriate impact assessment and disclosure in the financial statements required to appropriately communicate the impact to stakeholders.	An assessment of the accounting impact, including on hedge accounting and related implications for KPIs will be required.	At such times, it is important to continue preparing to ensure readiness when the window opens. Scenario planning and adjustment to IPO roadmap required.	Assessing the need for communications such as profit warnings or ad hoc publicity, or use of alternative (non-GAAP) performance measures required.	Adequate prioritising, project management and scenario planning so as to identify resource constraints, is essential to still deliver in a timely manner.

Coronavirus scenarios and mitigation for capital markets

COVID-19 will affect organisations to different degrees, requiring several actions.

Business issue

Significant supplier or customer disruptions, including decreased demand and business interruption.

Idle capacity or vacant facilities.

Liquidity constraints, changes in interest rates leading to re-financing, repurchase of debt, and/or difficulties in meeting covenants.

Significant business disruption and economic uncertainty will also have an indirect impact on many other areas of financial reporting.

Financial reporting areas affected

Revenue recognition
Impairment indicators for goodwill, intangible and tangible assets
Costing and valuation issues for inventory
Expected credit losses (ECL) for receivables
Government assistance

Modification vs. extinguishment of debt and derivatives
Hedge accounting
Impact on classification of debt (current vs. non-current)

Employee benefits and compensation plans
Liability recognition (onerous contracts, litigation, etc.)
Deferred tax assets, tax risks
Impact on areas where mark-to-market accounting is applied
Disclosures within and outside the financial statements.

Considerations/

actions

Identify events trigerring impairment
Updates to key assumptions for financial forecasts and valuation of assets/inventory
Revision of estimates of variable consideration (e.g. volume rebates)
Revising collectability assessment
Understand and reflect impact of government assistance

Revised hedge effectiveness testing and documentation
Calculate impact on historic and future projections for lenders and future market transactions.

Assess impact of revenue/earnings targets on employee compensation
Revisions in risk-free rates for calculating pension obligations
Recovery of deferred tax and updated assessment of tax risk
Increased volatility from mark-to-market accounting (e.g. contingent consideration, bifurcated derivatives)
Additional disclosures (e.g. financial risks, significant judgements and estimates)

Assessing the short and potential long-term impact on the business will be key. This will need to be reflected as part of financial reporting, where transparency becomes crucial in communicating with stakeholders. As such, impacts may include:

Adapting current workforce, processes and systems to new working practices as well as seizing opportunities through adapted or new business models;
Managing changes in financial exposure;
Revisiting internal and external financial information to enhance business partnering and efficient communication to investors;
Assessing (re-)financing requirements;
Deciding on capital markets activity based on the revised landscape.

Key questions to consider when recovering your business:

What are the temporary and long-term effects on the business, which need to be reflected as part of the financial reporting through people, processes and systems (both for existing and new/revised business models)?
Is there a need to further manage and train the workforce to be able to cope with increased needs for business partnering and shifting priorities beyond existing reporting & regulatory change needs?
What is the best way to communicate such effects to stakeholders?
Is there a need to adjust M&A and/or capital market strategy?
What is the impact on existing change programmes and functions?

Considerations relating to the ‘Recovery’ phase

Compliance with reporting requirements

Workforce and systems

Communication with stakeholders

Financial risk exposure

M&A strategy

Assess which areas of the business are having either a temporary or long-term effect, and adjust budgeting/scenario planning.

Ensure adequate reflection of such impact as part of regular and future financial and regulatory reporting. Prepare for increased regulatory scrutiny.

Adapting systems to facilitate remote working increases an entity’s ability to maintain social distancing rules, cope with increased demand, timely processing and minimise loss of productivity and further disruption from COVID-19, but also to seize new opportunities through adoption of new or evolving business models.

Timely communication with stakeholders, by way of ad-hoc communications, disclosures in the MD&A or as part of financial reporting to increase transparency related to the impact, and relevant changes to the business and operating model (where relevant).

Manage changes to liquidity and recalibrate whilst maintaining capital requirements. Consider impact of higher financial volatility, manage deposit fluctuations and client re-financing deals, and update credit impairment models. Evaluate exposure to increased claims (insurance).

Scenario planning and assessing the short and long-term effects may result in a revision of the organisation’s planned capital action. If preparing for a market transaction, it is important to maintain capital market/offering readiness to take advantage of favourable windows.

Guidance for the next phases

	Short-term	Medium-term	Long-term
CEO/Board of Directors	Assess short-term and potential medium-term impact on the business Focus on short and medium-term adaptation to the organisation (e.g. workforce, systems, short-term funding, cost-containment measures, re-prioritisation of capital investments)	Monitor business and market developments and (re-)define medium and long-term strategy Consider required (re-)prioritisation of capital and other investments (Re-)define M&A, funding options and capital market strategy	Monitor business and market developments and (re-)define long-term strategy Consider M&A for distressed assets, through carve-outs/divestitures or group reorganisations and simplifications while meeting regulatory reporting needs
CFO	Manage short-term liquidity needs, considering need to use capital and liquidity buffers Assess impact of additional demand of, for example, government-guaranteed credit Assess short-term financial impact and conduct scenario planning to assess potential medium/long-term impact Assess how to make workforce and systems more agile to cope with new needs	Introduce required measures for new business and operating model Assess interdependencies of existing change programmes (e.g. regulatory driven, other) Implement new policies, processes and systems to become more agile/facilitate remote working, and reduce productivity loss while providing needed business partnering to seize opportunities Train workforce in the use of new systems Define timing and needs for new investments and capital market activity	Monitor effectiveness of new operating model, introducing adjustments as required. Manage interdependencies of existing change programmes Assess adequacy of internal and external reporting to comply with new requirements Implement revised strategy related to new investments and capital market strategy Determine dividends & distributable reserves planning

Required on a continuous basis:

Communication to stakeholders
Monitor M&A and capital markets' activity and/or maintain capital market readiness (where relevant)
Manage interdependencies with existing change programs

Adapting current workforce, processes and systems to new working practices as well as to adapted or new business models;
Revisiting internal and external financial information to enhance business partnering and efficient communication with investors
Assessing (re-)financing requirements;
Deciding on capital markets activity based on the revised landscape.

Key questions to consider when recovering your business:

What are the temporary and long-term effects on the business, which need to be reflected as part of the financial reporting through people, processes and systems (both for existing and new/revised business models)?
Is there a need to further manage and train the workforce to be able to cope with increased needs for business partnering and shifting priorities?
What is the best way to communicate such effects to stakeholders?
Is there a need to adjust M&A and/or capital market strategy?
Is there a need to review existing financing requirements?

Considerations relating to the ‘Recovery’ phase

Compliance with reporting requirements

Workforce and systems

Communication with stakeholders

Financing/ Government stimulus

M&A strategy

Assess which areas of the business are having either a temporary or longer term effect, and adjust budgeting/scenario planning.

Ensure adequate reflection of such impact as part of regular financial reporting.

Adapting processes and systems to facilitate remote working and increase an entity’s ability to maintain social distancing rules, minimise loss of productivity and further disruption from COVID-19, but also to seize new opportunities through adoption of new or evolving business models.

Assessing the revised needs of the business will allow a revised assessment of the funding needs of the company, which may result in some companies restructuring their existing financing and/or requesting government support.

Scenario planning and assessing the short and longer term effects may result in a revision of the company’s M&A strategy as opportunities arise. If needing or preparing for a capital market transaction, it is important to maintain IPO readiness to take advantage of upcoming favourable windows.

Guidance for the next phases

	Short	Medium	Long term
CEO/Board of Directors	Assess short-term and potential medium-term impact on the business Focus on short and medium-term adaptation to the organisation (e.g. workforce, processes, systems, short-term funding, cost-containment measures, re-prioritisation of capital investments)	Monitor business and market developments and (re-)define medium and long-term strategy Consider required (re-)prioritisation of capital and other investments (Re-)define M&A, funding options and capital market strategy	Monitor business and market developments and (re-)define strategic funding options for longer term growth Consider M&A for distressed assets, through carve-outs/divestitures or group reorganisations and simplifications
CFO	Consider ability to fund short-term liabilities Assess need for additional funding requirements/government support Assess short-term financial impact and conduct scenario planning to assess potential medium/long-term impact Assess how to make workforce, processes and systems more agile to cope with new needs	Introduce required measures for new business and operating model Define timing and needs for new investment and (re-)financing Implement new policies, processes and systems to become more agile/facilitate remote working, and reduce productivity loss while providing needed business partnering to seize opportunities Train workforce	Monitor effectiveness of new operating model, introducing adjustments as required Assess adequacy of internal and external reporting to comply with new requirements Implement revised strategy related to new investments, M&A and funding strategy Determine dividends and distributable reserves planning