Financial Reporting Issues During COVID-19 Pandemic – A Case Study Of Briscoe Group Limited

Impact of COVID-19 Pandemic Related Uncertainties on Going Concern Assessment

The COVID-19 pandemic and associated uncertainties have created key impacts on how the companies carry out their financial reporting activities and disclosures. The preparers of financial statements now have to consider many additional factors in correctly conducting financial reporting amidst the pandemic. Some of the key aspects requiring additional consideration during the COVID-19 pandemic include the going concern assessment and accounting for the aspects like employee benefits, share-based payments and leases. Failure to correctly consider these aspects may lead to misleading or incorrect financial reporting. The purpose of this report is to discuss the financial reporting issues regarding the above-mentioned factors. The first part of the report discusses the impact of the COVID-19 pandemic related uncertainties on the company’s ability to continue as a going concern. This part sheds light on the factors that the preparers should consider when preparing the financial statements. The second part assesses the disclosures made by the selected company regarding NZ IAS 19 Employee Benefits (NZ IAS 19), NZ IFRS 2 Share-based Payments (NZ IFRS 2), and NZ IFRS 16 Leases (NZ IFRS 16). The last part discusses about the potential issues regarding applying one of these accounting standards in the selected company. The selected company is Briscoe Group Limited (Briscoe).

The management and directors of the companies have an obligation regarding going concern, and these obligations require them to comply with the going concern related accounting standard. As per these standards, the management is required to assess the ability of an entity to continue as a going concern and prepare the financial statements on a going concern basis unless the management has any intention of liquidating the business. The continuing impact of the COVID-19 pandemic continues to cause a substantial decline in many companies’ economic conditions leading to an increase in economic uncertainties. It requires the management/preparers of the financial statements to evaluate these conditions or events, either separately or together, which may cast substantial uncertainty on the capability of the company to continue as a going concern (deloitte.com, 2022).

These uncertainties are necessitating the preparers of the financial statements to question the gong concern assumptions. During this pandemic, many factors are there which contribute to substantial financial distress for the companies, such as a decline in the demand for the company’s products or services, a fall in sales, the pressure on profit margin, risk of supply chain failure, geographical implications of the pandemic and others. In this scenario, the procedures to assess risks related to going concerned are very different to that from the previous year (home.kpmg, 2022). The country’s lower economic activities due to the COVID-19 pandemic have resulted in an exceptional degree of uncertainty regarding the resulting future earnings of the companies. In this environment with high uncertainty, it is very challenging for the preparers to assess the going concern status of the companies to prepare the financial statements (assets.kpmg, 2022). It leads to increased questioning of the companies’ going concern assumption.

There are certain key factors that should be considered by the preparers of financial statements when assessing whether the company is a going concern. Three of these factors are as below:

1. The first factor is the financial challenges, as the availability of financing should be reassessed by the preparers because of the possibility that the firm may fail to secure the required financing or the cost may be higher amongst the uncertainties caused by COVID-19. New terms may be demanded by the lenders, such as enhanced collaterals or higher yields. In addition, the lenders may withdraw financing if the loan covenants are not maintained (kpmg, 2022).
2. The second factor that should be considered is the subsequent events. After the reporting date, if it is concluded by the preparer that the financial position and operating results of the company have been deteriorated further due to the consequence of an external event, the going concern assumption should be assessed further.
3. The third factor is the effect of the COVID-19 pandemic on the operations and cash flows of the company to assess whether the company has adequate liquidity to continue meeting its obligations as they fall due (kpmg, 2022).

Disclosures Made by Briscoe Regarding Key Aspects

Briscoe’s ability to continue as a going concern can be assessed by evaluating the impact of the above-discussed factors on the company.

The first factor is the financial challenges regarding the availability of necessary financing. An assessment of the 2021 Annual Report of Briscoe shows that the company did not face any financial challenge in 2021 regarding the availability of financing. The company has an unsecured debt facility for $30 million with the Bank of New Zealand. This debt facility is adequately flexible than the company can draw down the amount and repay it for accommodating operating cash flow related fluctuations without any prior approval from the bank. In addition, Briscoe issued 222,188,500 shares in 2021 compared to 221,599,500 shares in 2020 (briscoegroup.co.nz, 2022). Hence, the company did not face any going concern issues because of difficulty in raising the required financing.

The second issue is subsequent events. The declaration of the pandemic was a subsequent event for the company, and the COVID-19 pandemic affected Briscoe in different aspects in 2021. The board of the company cancelled the final dividend because of the potential impact of the COVID-19 pandemic. It was eligible for receiving the New Zealand Government wage subsidy of $11.5 million, which largely offset the financial impact of the pandemic. The landlords were engaged by the company for rent relief (briscoegroup.co.nz, 2022). However, these events did not affect the company’s ability to continue as a going concern.

The third issue was related to the operating performance and cash flows of the company. The assessment shows the company recorded a free cash flow of $81.1 million in 2021 compared to $46.7 million in 2020, and it implies that the company did not face any issues related to cash flows. In addition, operating profit of the company in 2021 increased significantly to $115,886,000 from $97,223,000 in 2020 (briscoegroup.co.nz, 2022). All of these imply that the company did not face any going concern issues from the third factor.  

Table 1: Disclosure Checklist

Briscoe is a retail chain in New Zealand. It operates through many stores throughout New Zealand under two retail sectors: homeware and sporting goods. These goods are operated under the brand names Briscoe Homeware, Living & Giving and Rebel Sport. Apart from brick and mortar stores in the major towns of New Zealand, the company uses the online channel for selling its products (briscoegroup.co.nz, 2022).

NZ IAS 19 – This accounting standard requires the companies to disclose all the necessary details and information on the defined benefit plans in the annual report. By complying with the disclosure requirements of this standard, Briscoe has disclosed the amount that is recognised as an expense for the benefits received by the employees. The total amount of employee benefit related expenses of the company in 2021 and 2020 is $3247000 and $2648000, respectively (briscoegroup.co.nz, 2022). By maintaining compliance with this standard, Briscoe has disclosed all the details of the employee benefits, including contribution and defined benefit plans. The company has also disclosed how these plans have affected its financial statements like income statements and balance sheets. For example, the bonus plan was recognised as a liability, and long service leaves have also been disclosed as a liability (Bradbury & Scott, 2021).

Potential Issues Regarding Application of Accounting Standards

NZ IFRS 2 – As per the requirement of this standard, all the necessary disclosures associated with the share-based payments need to be made by the companies. By complying with these disclosure requirements, Briscoe has disclosed all the details and information under note 6.2 Employee Equity-Based Remuneration (briscoegroup.co.nz, 2022). These disclosures include a description of each share-based payment like equity-settled share options and equity-settled performance rights. Other disclosures made by the company regarding share-based payments are movement in the number of share options, granted performance rights, estimated fair value, and others (van Zyl and Uliana 2022).

NZ IFRS 16 – This accounting standard requires the companies to disclose the key information on their leases in the notes to the financial statements. Briscoe has ensured disclosing this information as per the disclosure requirements. As required by this standard, the company has divided its leases into right-of-use assets and lease liabilities. Details have been disclosed in a single note of financial statements that note 3.5 Leases (briscoegroup.co.nz, 2022). The key details disclosed by the company regarding its leases are depreciation against right-of-use assets, interest expenses related to leasing liabilities, movements in leases like additions and surrenders, lease-related expenses, lease payments and others (Öztürk and Serçemeli 2016).

Briscoe’s accounting for leases under NZ IFRS 16 may lead to some possible issues, and two of these issues are discussed below:

1. NZ IFRS 16 needs the companies to make a large number of estimates that include the lease and non-lease components’ selling price, the length of the lease terms, the amount payable and others (com, 2022). As per the latest annual report of Briscoe, the lease is one of the two areas where the management has used a number of estimates and judgements. More specifically, judgments are used by the management to determine where there is reasonable certainty that it will exercise an extension or termination option. These estimates and judgements are subjective in nature which can eventually make the lease accounting of the company subjective, thus, failing to reflect the true financial position and performance in terms of leases. Moreover, the use of these judgements and estimates will require new information, and the lack of this information can make the lease accounting of the company incorrect.
2. Another new area under NZ IFRS 16 is a modification which the companies account for as either distinct leases or as decreases or increases in present leases and right-of-use assets with the need to recognise loss or gains in profit or loss. In order to treat this accounting phenomenon, Briscoe needs to obtain information about whether the scope of the leases is decreased by the modification by adding the right of using one or more original assets and whether considering the lease modification represents the stand-alone sale price for the modification. Therefore, during applying this standard fully retrospectively, it can be a challenging matter for the company to obtain all the information for all the previous modifications (kpmg.us, 2022).

Conclusion

The preparers are financial statements are questioning the going concern assumption of the companies since the COVID-19 pandemic has created major uncertainties in different aspects of the business, which are making it difficult for the companies to continue as a going concern. Assessment of the 2021 annual report of Briscoe shows that the major factors associated with the COVID-19 pandemic did not create any material uncertainty over its ability to continue as a going concern. It can also be seen from the above discussion that Briscoe has adequately disclosed all the material and important information on the accounting for employee benefits, share-based payments, and leases. It implies that the company has fully complied with the requirements of NZ IAS 19, NZ IFRS 2 and NZ IFRS 16. It can also be seen that two possible issues associated with the application of NZ IFRS 16 are the use of estimates and judgments and the modification of leases. These aspects can make it challenging for the company to implement this accounting standard.

References

Analysing the going concern assumption under the COVID-19 scenario. assets.kpmg. (2022). Retrieved 1 April 2022, from https://assets.kpmg/content/dam/kpmg/in/pdf/2020/04/aau-covid-19-financial-reporting-impact-going-concern-rbi-measures-chapter-1.pdf.

Annual Report 2021. Briscoegroup.co.nz. (2022). Retrieved 1 April 2022, from https://www.briscoegroup.co.nz/globalassets/corporatewebsite/contentpages/investorcentre/reports/br8055-briscoes-annual-report-2021-final.pdf.

Bradbury, M. E., & Scott, T. (2021). What accounting standards were the cause of enforcement actions following IFRS adoption?. Accounting & Finance, 61, 2247-2268.

Group, B. (2022). About Us | Briscoe Group. Briscoe Group. Retrieved 1 April 2022, from https://www.briscoegroup.co.nz/about-us/.

IFRS 16 Leases: impact, challenges and solutions | Deloitte Central Europe. Deloitte. (2022). Retrieved 1 April 2022, from https://www2.deloitte.com/ce/en/pages/finevare/article/irrs-16-leases-impact-challenges-and-solutions.html.

Impact of COVID-19 on the going concern assessment and disclosures. Home.kpmg. (2022). Retrieved 1 April 2022, from https://home.kpmg/be/en/home/insights/2020/12/covid-19-going-concern-3a.html.

Lease modifications – definition and accounting. Advisory.kpmg.us. (2022). Retrieved 1 April 2022, from https://advisory.kpmg.us/articles/2019/lease-modifications.html#:~:text=IFRS%2016%20defines%20a%20lease,between%20the%20lessee%20and%20lessor.

Öztürk, M. and Serçemeli, M., 2016. Impact of New Standard” IFRS 16 Leases” on statement of financial position and key ratios: a case study on an airline company in turkey. Business and economics research journal, 7(4), p.143.

van Zyl, W. and Uliana, E., 2022. Fixing diluted earnings per share: Recognising the dilutive effects of employee stock options. Accounting & Finance.

What is the impact of COVID-19 on your going concern assessment?. Www2.deloitte.com. (2022). Retrieved 1 April 2022, from https://www2.deloitte.com/content/dam/Deloitte/au/Documents/audit/deloitte-au-audit-what-impact-covid19-going-concern-assessment-210720.pdf.

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