Through Circular No. 140-2020-SMV/11.1, dated May 25, 2020 (“Circular”), the Superintendence of the Securities Market (“SMV”) has communicated to companies with securities registered in the Public Registry of the Stock Market, the considerations and recommendations to be taken into account in the preparation of their financial statements, in response to the situation created by the COVID-19 crisis.
The Circular notifies these entities of the document called “Impact of the pandemic and crisis by COVID-19 on the Financial Statements of companies with securities registered in the Public Registry of the Stock Market – Main Considerations and Recommendations in Risk Assessment, in the Measurements, Estimates and Disclosures of the Financial Statements Prepared in Accordance with IFRS” (“Document”), in order to serve as a guide on the main accounting aspects and matters that, according to the SMV, must be of concern to the company and its organs and must be considered in the preparation of said financial statements.
The Circular indicates that, although the Document is formulated as recommendations, it essentially reflects what the International Financial Reporting Standards – IFRS and the regulatory framework provide, therefore the emphasis contained in the Document must be evaluated and applied in the next financial statements that the entity publishes.
Among the aspects that the Document considers must be emphasized in the preparation of said financial information, are the following:
Management must evaluate the relevant information that is available to determine if there are significant uncertainties about the company’s ability to continue as a going concern (IAS 1), and must disclose such uncertainties.
In the event that the intention to liquidate or terminate activities in the company is concluded, the going concern scenario shall not be the adequate basis for the preparation of the financial statements, and must disclose this fact as well as the basis for the preparation of the financial statements and the reasons for the conclusion. On the other hand, in the event that it is concluded that the going concern scenario is adequate despite the existence of material uncertainties, it must be disclosed in the financial statements: (i) the main facts that raise doubts about the ability to continue as going concern, and plans to deal with them; and (ii) material uncertainty that may put a risk the company’s ability to realize assets or settle liabilities in the ordinary course of business.
It is the responsibility of the Board of Directors and Management to evaluate and estimate the financial impact that the pandemic and crisis due to COVID-19 could have on the financial and economic situation of the company, as well as on the main projections on which it prepares its financial statements, determining if said impact is material.
To this end, the Document identifies the main accounting standards to be taken into account and suggests how they should be addressed (IFRS 13, on Fair Value; IFRS 15 regarding income from ordinary activities; IAS 36 regarding the possible impairment of non-financial assets; IAS 2 regarding inventories; IAS 16 on property, plants and equipment; IFRS 7 and 9 regarding financial instruments; IFRS 16 on leases; IAS 37 regarding onerous contracts and restructuring provisions; and, IAS 20 on government aid).
A point to highlight for issuers is that the Document requires disclosure in the financial statements of the impact that the breach of assumed commitments and safeguard clauses could cause under contracts that activate clauses that imply significant adverse changes in the company and that could have the effect of anticipated maturities, and even the immediate enforceability of the obligation.
In this regard, the Document suggests reviewing the long-term financial liabilities that such commitments have and monitoring or managing compliance, since a breach could place the company in extreme situations and affect continuity as a going concern.
For events occurring after the reporting period, but before their authorization to be published, companies shall assess whether, as a result of the events that occurred, it is necessary to make adjustments to their financial statements, evaluating the impact of events such as the temporary cessation of operations and the isolation measures imposed.
If the companies find that the events are material, but do not warrant making adjustments to the financial statements, they must disclose in the notes the nature of the events that have occurred and estimate their effects, or in any case, explain the impossibility of making such an estimate.
The Document states that, in accordance with IAS 34, the interim financial information prepared by companies must include an explanation of the events and transactions that have occurred since the end of the last annual period, that are significant to understand changes in the financial situation and economic results.
The SMV specifies that both the notes to the financial statements and the Management Report that includes the Management Analysis and Discussion that must be prepared in accordance with the provisions of the Manual for the Preparation of Financial Information (CONASEV Resolution No. 103- 99-EF/94.10), should be used by companies to disclose all significant issues and should seek to facilitate understanding of related financial information.
Likewise, it is specified that, in view of the new risks associated with the preparation of financial information, linked to its integrity and reliability, it is necessary that the Management Analysis and Discussion section in the Management Report specify how risks are being managed with the internal control system that has been operating for the preparation and reporting of financial information.
This communication has been prepared by the banking and financial area of Rodrigo, Elías & Medrano Abogados.
