The Accounting Standardisation Committee (TNC) regarding the various issues related to the effect of the COVID-19 pandemic on the financial statements has been issuing recommendations to clarify companies using national accounting regulations on how to determine and report on the impacts of covid-19 situations in their financial statements.
The CNC issued the following recommendations:
Recommendation 4
Treatment of agreements for reduction and/or deferral of income under the COVID-19 pandemic
(approved on 22 June 2020)
The Covid-19 outbreak has been classified as a Pandemic by the World Health Organization As a result of the Covid-19 outbreak, agreements between landlords and renters are being concluded in some cases to reduce and/or temporarily defer rental income.
With regard to Portugal and the Companies and Entities that apply the Accounting Standardization System (SNC), cnc recalls that:
- The provisions of Accounting and Financial Reporting Standard 9 (NCRF 9) provide that expenditures (by lessees) and income (by lessors) on operating leases shall be recognised on a straight-line basis during the lease term, unless another systematic basis is more representative, as provided for in paragraphs 27 and 38.
- The corresponding disclosures must be made.
The following scenarios are considered more common:
- Reduction of rent/rent
In these cases, there is a negotiated agreement between the lessor and the lessee under which the price of the service provided is reduced, which can reach 100. Thus, both the lessee and the lessor acknowledge the expense and income, respectively, at the agreed final value (i.e. by the amount of income deducted from the agreed reduction). It is recommended that the amendment of the negotiated conditions be disclosed in the Annex. - Deferral of payment dates of
rent/rental. In these cases, the agreement negotiated between the lessor and the lessee translates into the postponement of the payment of the service.
In any case where the effect of the deferral is material in determining the temporal value of the money, the value of the income(s) to be recognized in liabilities by the lessee shall be adjusted to the present value of the expenses that are expected to be necessary to settle the obligation. Similarly, and attentive to the materiality of the deferral effect, the lessor measures the asset by the present value of the income(s) receivable.
The CNC considers that this recommendation applies to entities using THE NCRF, NCRFPE, NCME and NCRFESNL, with appropriate adjustments, in particular with regard to adjustments arising from the time value of the money.
Approved by CNCE on June 22, 2020
Recommendation 5
Treatment of the allocation of extraordinary conditions to financing under the COVID-19 pandemic
(approved on 22 June 2020)
As a result of the Covid-19 outbreak, extraordinary conditions are allocated to financing contracts concluded between financial institutions and companies and other entities.
The most common procedure is the allocation of a moratorium which provides for the extension for a certain period of capital payment credits at the end of the contract, maintaining all its associated elements, including interest and guarantees.
Thus, the use of the moratorium procedure results in a change in the profile of future cash flows associated with the contracts, even if the remaining contractual conditions remain unchanged, since the amount payable on each date is changed.
Therefore, assuming that the contractual change is not significant, in any case where the effect of the deferral is material in determining the temporal value of the money and the effective rate of the loan differs from the nominal interest rate, the value of the financing in the liability should be adjusted, giving rise to a financial return, since the liability must correspond to the current value of future cash flows using the original effective interest rate.
This recommendation applies to entities using NCRF.
Approved by CNCE on June 22, 2020
Recommendation 6
Recommendation on the impact of the COVID-19 pandemic on the impairment of non-financial assets (NCRF 12)
(approved on 22 June 2020)
COVID-19 has had a significant effect on the economy and concrete activity of companies and may also have an impact on the recoverable value of its non-financial assets.
However, although COVID-19 alone is not an indication of impairment, it is recommended that each company assess the possible impact of COVID-19 on its activity.
Taking into account the specific characteristics of each entity, it will assess whether there are some indicators that its assets may be subject to impairment losses, such as a significant reduction in sales and/or a reduction in the market value of assets. If so, entities shall carry out impairment tests on their assets.
Despite the context of uncertainty, entities should prepare cash flow projections based on reasonable and bearable assumptions representing the best estimate of economic conditions that will exist over the remaining useful life of assets, giving greater weighting to external evidence. You will also need to choose an appropriate discount rate.
It is also recommended that impairment disclosures be particularly detailed in this context of exceptionality, highlighting the assumptions used in determining the recoverable value of assets.
Approved by CNCE on June 22, 2020