Principles to keep in mind while preparing a Combined Financial Statement or Consolidated Financial Statement

How to prepare combined financial statement and consolidated financial statement

If you are an owner of multiple businesses or the majority shareholder of a Company which is part of a group and is under a parent / subsidiary relationship, it’s important to understand your options when it comes to preparation of financial statements and reporting for stakeholders. Being an owner of the Company / group, you need to know what the financial statements show about the financial health of your business and the subsidiary / associate companies. The more you know about financial statements, the more likely you’ll be an informed and discerning owner / shareholder of the business.

A Brief understanding of financial statements

Financial statements are reports that summarise important financial accounting information about your business. According to IAS 1 Presentation of Financial Statements, there are four main types of financial statements: the statement of financial position or ‘balance sheet’, the statement of comprehensive income or ‘income statement’, statement of changes in equity and statement of cash flow.
In layman terms, the financial statement is like a report card for a Company to measure its performance through the Statement of Comprehensive Income, and Statement of Financial Position is used to ascertain its Grade. The following Grades provide confidence to the stakeholders, who decide to what extent they have to rely on the entity.

Types of financial statements

Being an owner of multiple businesses, whether owning a Parent company or owning and holding control in various entities or groups of companies, it is required to prepare the financial statements of the entity to disclose their financial results. The commonly used financial statements are:

  1. Single entity financial statement;
  2. Consolidated financial statements; and
  3. Combined financial statements.

In this article, we will further explore the above, keeping the owners’ mindset in mind and will briefly provide an understanding of the meaning of all these financial statements, their purpose, and their usefulness.

a)Single Entity Financial Statements

Single Entity financial statements, or Standalone financial statements, represent the financial position and the performance of the company as a single entity without taking into account the financial position and the performance of its subsidiaries, etc. The financial statements of the entity are written records that convey the business activities and the financial performance of a company.

b)Consolidated Financial Statements

In a consolidated financial statement, the financial results of the subsidiaries are included in a single financial statement with the parent company, as if the parent company and the subsidiaries were one entity. While the subsidiaries operate separately from the parent company, a consolidated financial statement reports on the group, with the parent company and subsidiaries together making up the financial picture of the group.

As per the guidelines from International Financial Reporting Standards on Consolidated financial statements (FRS 10), a few key factors to keep in mind are that a consolidated financial statement must be prepared, rather than a combined financial statement, when the parent has:

  1. Power over (controlling rights) the subsidiary – rights that give the parent the ability to direct the relevant activities of the subsidiary;
  2. Exposure/rights to (variable) return – rights to returns that aren’t fixed and may vary based on the performance of the subsidiary; and
  3. Ability to use its power – to affect the amount of returns.

Keep in mind that there is additional application guidance in which assessment of control is difficult.

C)Combined Financial Statements

On the other end of the spectrum, combined financial statements are, simplistically, when two or more entities/segments report their finances in a combined document. Within the document, financial statements presenting the historical financial information of a circumscribed area of economic activities for which consolidated financial statements are not prepared in order to present the financial position of the combined economic activities, as well as their financial performance and cash flows.

Combined financial statements are prepared where a reporting objective exists for two or more legal entities who are all commonly owned or controlled by an individual or group of individuals who wanted to see the financial results for these subject entities as a single unit. Further, they do not by themselves meet the definition of a group under IFRS 10.

In many cases, it is not just entities that are included when preparing combined financial statements but also parts of entities. This can be the case when the parts of entities are sufficiently identifiable and, from a financial reporting perspective, separable from the entity which they are part of.

To prepare a combined financial statement, all entities/segments are under common control during the reporting period. Common control can be:

  1. A Common Control / Management Approach – A common person or entity or part(s) of entities may be combined, if they were under common control as per the respective reporting framework. This approach reflects the control principle currently allowed for the preparation of financial statements for economic activities, which were, for the respective reporting period, part of a larger group or commonly controlled by the same individual(s).
  2. A Common Ownership Approach – Entities or parts of entities may be combined if all combined entities or parts of entities were under common ownership. It can be a case where entities are jointly owned, but not commonly managed by the same management. It further allows the preparation of combined financial statements regardless of any changes in the Management structures and enables those preparing the statements to show the historical track record of economic activity for every period during which this economic activity is commonly managed.

A Comparison of Consolidated Financial Statements vs. Combined Financial Statements

# Description Key features of Combined Financial Statements Key features of Consolidated Financial Statements
1 Ownership, relationship and its use Combined financial statements are used where the entities are under common control but do not have parent-subsidiary relationships. One of the examples which we can use here is, combined financial statements based on Investor Interest. In addition, combined financial statements, equity of the entities which are being combined (may or may not be subsidiaries) are added. Consolidated financial statements are presented where there is a parent-subsidiary relationship, which means one (parent) is owning and controlling the other company (subsidiary) by way of exercising control either by holding shares of the subsidiary or right to direct the profits towards the parent company.
2 Accounting Treatment of Intercompany Transactions Accounting treatment for combined financial statements eliminates intercompany transactions and balances, but rarely emphasises, the unrealized gain or loss on inventories or assets unless identical and material in value/nature. Accounting treatment of consolidated financial statements eliminates intercompany transactions. These are transactions that occur between the parent and subsidiary company. These transactions must be eliminated in order to avoid double-counting, once on the books of the subsidiary and again on the parent’s books. This avoids misrepresenting transactions that distort the actual results of the parent company and subsidiary.
3 Similarities on the Income Statement Both combined and consolidated financial statements add the subsidiary companies’ income and expenses to the parent company. This creates a total income and expenses for the entire group of companies, including the parent.
4 Differences in the Reporting of Stockholders Equity In combination, the equity for all the entities is totalled and presented accordingly, whereas in consolidation only the Parent share capital is disclosed, while the retained earnings are accumulated after necessary adjustments e.g. unrealized gain and loss and then split into parent and NCI portions.
Combined financial statements add the stockholder’s equity to that of the parent. This is because the parent has a controlling interest in the subsidiary group of companies.
Consolidated financial statements simply eliminate the stockholder’s equity section of the subsidiary. Therefore, there are no changes to shareholder equity accounts, such as stock and retained earnings.
5 Non-controlling Interest In Combined financial statements, there is no non-controlling interest separately shown and the financial results are combined based on common ownership and control. In consolidated financial statements, accountants must keep track of the non-controlling interest relationship between the parent and subsidiary. This creates an account called non-controlling interest or minority interest, which tracks the part of the subsidiary not owned by the parent.

Which type of Financial Statement to use?

When the parent has power over the subsidiary, rights to variable return from its involvement with a subsidiary, and the ability to use its power over a subsidiary to affect the amount of return, you must file a consolidated financial statement as per IFRS 10.

Whereas a combined statement can be prepared in the situation when two or more entities are under common control, but there is no actual parent company relationship that exists. The combined statement is much easier to prepare since it simply requires a set of separate financial statements for each entity.

It is more important to be able to assess each entity on its own merits instead of as part of the unified whole, then the combined financial statement may be more suitable.

As with much of the reporting that is done specific to a business, which is the end goal, Assessing the parent and subsidiaries as a whole vs. assessing the individual components—will help you determine which financial statement structure is better for presenting your financial information.

How can we help you professionally?

With our well-diversified professional services, we can support in the preparation of different types of financial statements according to the ownership structure and set financial reporting standards and can assist you in evaluating the relationship between different entities of the Group.

In case you have any questions regarding your reporting obligations for your organization, please contact us at or call us on +971 4 425 6616.

What Safety Measures Restaurants should take during the COVID-19 Pandemic

Steps restaurants can take to get more customers during pandemic

After months of being stuck at home during lockdown, even the most experienced home chef would be longing for a meal that he or she did not labour to make in their kitchen. For some, a reason to change out of their sleepwear and get out of the house—with or without the kids—is becoming more of a necessity to keep their sanity than a celebratory activity. In short, people are eager to be able to eat out again.

It is safe to say that most, if not all, in the food-service industry are also eager to welcome back the diners that they are used to serving. Business owners are eager to be able to reopen and recover lost earnings while the service staff is eager to earn again after months of being without work. There are also many who simply miss the satisfaction of serving people meals that nourish them and giving them an enjoyable dining experience; who missed the creative expression that came with their food industry jobs. Whether it is grabbing an inexpensive meal at a quick-service restaurant or an exquisite dining experience at a fancy restaurant, food safety and the assurance that a consumer will not go home with a COVID-19 infection is of paramount concern to everyone.

For the employers or business owners and their management team, the responsibility for prevention and management of outbreaks rests on their shoulders.

  • Take steps to ensure that staff adhere to existing and additional government regulations to keep the workplace safe while the COVID-19 threat still exists.
  • Conduct a COVID-19 risk assessment of the entire workplace; having a tried and tested business continuity plan in place would also be a big help.
  • Increase visible monitoring and enforcement of control measures including HACCP-based SOPs.
  • Conduct regular reviews, including seeking feedback from staff and customers to identify areas for improvement.

All employees, on the other hand, must be more vigilant, strictly following all processes put in place to ensure food safety. Although it is very unlikely COVID-19 could be transmitted through properly prepared food or food packaging that is properly handled, staff must observe good hygiene practices at all times.

  • Wash hands frequently with soap and water for at least 20 seconds (or sanitise), especially before and after handling food, cleaning cutlery, dishes, glasses, or other items to be used by the customer.
  • Staff that handle dirty or used items, collect used dishes from customer tables, and handle payments should be designated for these activities only, whenever possible.
  • All employees must ensure their thorough understanding of all HACCP principles and:
    • identify any food handling hazard;
    • identify the critical control points (CCPs) to prevent, remove or reduce a hazard;
    • set limits for CCPs;
    • monitor the CCPs;
    • immediately correct any problem with a CCP;
    • put checks in place to make sure the HACCP plan is working; and
    • keep accurate and up-to-date records.

There are other resources available for business owners that could help to further reassure their customers that their establishment is a safe environment for them to be in. The World Travel and Tourism Council (WTTC) has come up with a global safety stamp to recognise establishments around the world who have adopted policies and protocols that ensure the safety of consumers (for more info, click here). Certification agency Bureau Veritas has also launched a Safeguard label for shops, restaurants, and other confined spaces were people gather (for more info, click here or here).

With business owners and their employees clearly understanding how their cooperation will ensure their customers will be safe while in their premises, this will allow for a more comfortable, enjoyable, and most importantly, COVID-19 safe customer experience. If you are in need of help with regards to implementing HACCP or another food safety management system such as ISO 22000 in your establishment, contact Affiniax Partners for a free consultation.


Is it Safe to Travel Once Again?

List of guidelines for businesses during Covid-19

Is it safe to travel once again? What is being done at the moment to make it safe to travel once more? Despite the health risks and economic slowdown, travelling between cities or countries cannot be completely avoided.

The travel and tourism industry is no doubt one of the hardest hit, if not the hardest hit, by the ongoing COVID-19 pandemic. From the time the first outbreak on a cruise ship was reported, up to the recent string of airline bankruptcies and aircraft manufacturer layoffs. Add to this all the related local service industries and businesses that are dependent on tourists and business travelers that have either closed temporarily or been forced to close for good. So, what is currently being done to help make travelling safe once again?

  1. The World Travel and Tourism Council (WTTC), along with governments and health experts, developed action plans to aid in the recovery efforts for the industry. They have come up with a global safety stamp to recognise governments and companies around the world who have adopted policies and protocols that ensure the safety of consumers and travelers. They will also be publishing protocols for the Hospitality industry, Attractions, Outdoor Retail industry, Aviation industry, Airports, Short Term Rentals industry, Cruises, Tour Operators, Convention Centres and MICE, Car Rental industry and Insurance industries. For more information, visit
  2. Bureau Veritas is an international organisation that tests, inspects and certifies other organisations according to accepted international standards. They have launched a Safeguard label “to provide reassurance to partners, customers and employees that the entities carrying the label have undergone checks and audits of the preventive measures in place”, according to their site. Commonly used in the hospitality industry, it can also be given to shops, restaurants, and corporate buildings, or other confined spaces where people gather. It covers audits of facilities, processes, staff, and hygiene/cleaning. This certification is valid for six (6) months, and a reassessment needs to be conducted in order to be able to continue to keep the label.  For more information, visit or
  3. Spain’s Association for Standardisation (UNE) collaborated with its Institute for Spanish Tourism Quality (ICTE) to publish a series of specifications which in turn put in place guidelines and recommendations for reducing the risk of the spread of COVID-19 in its tourism sector. They have made these documents available for anyone to use on
  4. The emirate of Dubai in the United Arab Emirates went a step further and came up with an assurance stamp for all establishments that adhere to the government’s safety standards. After a thorough verification and validation process, the stamp can be displayed to let all consumers know that they are entering a place that follows rigorous safety and hygiene measures. The stamp is valid for only two (2) weeks, further reassuring the public that as long as the stamp is displayed, the place they are entering continuously meets safety requirements.

In most countries, the challenge that businesses face in dealing with the COVID-19 pandemic is the lack of a consistent and reliable approach. ISO’s technical committee on tourism and its related services is developing ways to support organisations and to prevent the further spread of COVID-19, but in the meantime, ISO 22483:2020 Tourism and Related Services can be a valuable resource.

Contact us if you want to find out how any of the news above can help you and your team get started on your road to recovery in a post-pandemic business environment.

UAE Economic Substance Regulation ESR: Major Overhaul

New ESR law 2020

The United Arab Emirates (“UAE”) Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020 on 10 August, 2020. This resolution replaced the original Cabinet Resolution No.31 of 2019 (the original ESR law) concerning the Economic Substance Regulation (“ESR”). The UAE Ministry of Finance has now also updated its website with further information regarding the changes to the regulation. Since the application of the new resolution is retrospective (i.e. effective 1 January, 2019), all companies are advised to revisit Notifications already submitted.

The most prominent update in Cabinet Resolution No. 57 of 2020 was the appointment of the Federal Tax Authority (“FTA”) as the National Assessing Authority for the assessment and determination of ESR compliance and governance.

Major changes introduced in the ESR legislation include:

  1. The Federal Tax Authority has been appointed as the National Assessing Authority for the enforcement, assessment and determination of compliance with ESR rules by the licensees.
  2. The amended ESR (issued on 10 August, 2020) now covers juridical persons (those with separate legal personality) and unincorporated partnerships, while excluding natural persons – including sole proprietors, trusts and foundations. Also, the licensees that are now exempt include Investment funds, entities being Tax Resident outside the UAE and UAE branches of a foreign company (head office / parent company) whose relevant income is subject to Tax in a foreign country.
  3. As branches do not have separate legal identity from their parent or head office, they are not regarded as “Licensees”.
  4. Distribution & Service Center Business: The new regulation emphasises and clarifies that, for a trading business, there is no requirement to import and stock goods in the UAE in order to be considered as a Distribution and Service Center Business. Further, the law also clarifies that any services provided to foreign connected persons shall be considered a relevant activity (previously it stated that such services are only considered a relevant activity if they are “in connection with a business outside the State”).
  5. A Connected person shall be any entity that is part of the same group as a Licensee. Groups are defined as “two or more entities related through ownership or control such that they are required to prepare consolidated financial statements for financial reporting purposes under the accounting standards applicable thereto”.
  6. High Risk Intellectual Property Licensee The definition of a High-Risk Intellectual Property Licensee has been limited to an Intellectual Property Business that meets all of the following conditions:
    a) Licensee did not create the IP asset;
    b) Licensee acquired the IP asset from a connected person or in consideration for funding, research and development by another person situated in a foreign jurisdiction, and
    c) The Licensee has sold the intellectual property asset to a connected person or earns separately identifiable income from a foreign connected person in respect of the use or exploitation of the intellectual property asset.
  7. As the application of the amended ESR law is retrospective (i.e. effective 1 January, 2019), companies that have already submitted the ESR notifications based on the previously issued Cabinet Resolution No.31 of 2019 will need to re-submit the notification based on the new law for ESR i.e. Cabinet of Ministers issued Cabinet Resolution No. 57 of 2020. Further guidance on this matter is yet to be announced by the Ministry of Finance.
  8. The deadline for the annual ESR Notification is within 6 Months from the end of the Licensee’s financial year.
  9. The deadline for the annual ESR Report is within 12 months from the end of the financial year, same as before.
  10. The Penalty for non-submission of the ESR Notification by a licensee is now increased to AED 20,000 while the penalty for non-submission of the Annual report is now AED 50,000.

Given the above updates, and in particular the appointment of the FTA, the scope of ESR is increasing and demonstrates the UAE’s increased commitment towards international tax and reporting compliance. Also, the appointment of the FTA means that there shall now be a bridge between License issuing Authorities and the Federal Tax Authority. As observed in the enforcement of VAT laws in UAE, the FTA shall be thoroughly assessing the information being submitted under the ESR Notification and Annual Report.

It is strongly recommended that all Licensees re-assess and re-evaluate the already submitted ESR notification to ensure that they are in compliance with the updated regulation. Licensees that did not submit a Notification on the basis that the original ESR law did not apply to them may need to re-evaluate their position under the amended ESR law.

To understand more about how the above changes in ESR affect your business, please reach out to us on

How to improve Cash Flow Management during COVID-19

Accounting solutions to help business survive covid

A couple of months ago, we wrote a blog describing “WHY BUDGETING IS CONSIDERED KEY TO BUSINESS FINANCIAL SUCCESS?” and one of the mentioned benefits of budgeting was planning and predicting cash flows. We assume that, due to the unpredictable events caused by COVID-19, there would be a major change in the budgeted figures and improving cash flow is important to help owners make decisions that will influence the future of their company.

As a major portion of cash revolves around accounts receivable and payable, let us examine some methods to achieve budgeted cash flow through its proper management.

  • Improve Receivables Credit Policy: Review your receivable credit policy i.e. your credit terms. It should be less than the credit period given to you by your suppliers. In order to improve your receivables credit period, you can encourage customers to pay faster with an early payment discount scheme.
    On the other hand, you can check with your supplier if payment terms can be increased on the basis of your long-term relationship. If not all, some of them may agree and extend your credit period from (hypothetically) 30 days to 45 days.
  • Advance Payment: If you are providing a service or goods that involve substantial cash or effort before delivery of said service or goods, ask your customer to pay a portion of that as an advance. An advance can range between 30%-50%, depending on the agreement with your customer and the type of services or goods to be provided.
  • Transaction cycle between receivable and payable should not be too long, or else you will end up investing in additional human resources or will end up paying interest on delay in payments to your suppliers.
  • Invoice financing: This option is also known as invoice factoring, invoice discounting or, in simple terms, selling your sales invoice to finance companies or banks. For example, if you have credit terms of 30 days with a customer, you can get the amount from a finance company on the day the invoice was issued, instead of waiting for 30 days.
  • Set up a policy for long outstanding receivables: Set up a policy indicating the maximum period it should take to clear a customer’s account. If any outstanding receivables exceed the maximum period, act immediately and suspend any further business with that client until their account is settled.
  • On-time Accounting: Record all transactions immediately and keep track of aging summary on a regular basis.
  • Use Automated feature of accounting software: Tracking receivables and payables manually would be time consuming and more cumbersome if even a single document is missed. Automating the process will help you with quick compilation of information and send regular reminder mail to customers for payment without interrupting your routine work.

Other than the methods mentioned above, you can also improve cash flow by converting fixed costs into variable costs, cutting or delaying expenses, looking to sell or lease idle assets, checking for deferment of loan instalments, lowering instalment amounts etc.

It is very important that you consider your business model before selecting from the above methods to improve cash flow. Contact us for more information

Instant License in Dubai

What is an Instant License?

The Instant License is a trade license available to those intending to carry out commercial or professional business activities and can be obtained within minutes. For an instant license, you do not need to submit following documents to the Dubai Economy (DED):

  • Memorandum of Association
  • Office Tenancy Contract

It is a great opportunity given by the government to invest in Dubai by providing a one year grace period to conduct business.

What are the benefits of an Instant License?

Generally, the process of obtaining a UAE mainland trade license can be quite long, depending on the company activity, document preparation time etc. Additionally, a tenancy contract / Ejari is mandatory for the licence to be issued. With the Instant License, businesses are able to take advantage of the numerous benefits, which include:

  • License Issued in minutes
  • Immediately trade and perform business activities
  • Significantly less paperwork
  • Cost-effective first year of business
  • Opportunity to explore & discover the Dubai market
  • Memorandum of Association not required for the first year
  • Tenancy / Ejari not required for the first year.

Who is Eligible for an Instant License?

Any Company whose activities do not require external approval can apply for an Instant License. Trading / professional companies with specific activities require an external approval and are not eligible for Instant Licenses.

Instant Licenses are available for the following legal structures:

  • Limited Liability Company
  • One Person LLC
  • Sole Proprietorship
  • Civil Company
Note : A Person who requires a CID approval due to sanctions/restrictions in the UAE is not eligible for the Instant License.

What documents and information are required to apply?

Those applying through outsourced service centers will require:

  • Passport copies of all partners – all partners must be present during the official application process
  • Residence visa copy and Emirates ID
  • NOC from current sponsor / employer (if required for foreign shareholder)
  • Local Sponsor passport copy and Emirates ID
  • Individuals applying for a General Trading licence in Dubai will need to apply for DED e-services and obtain a Dubai Smart Pass ID
  • Details of Trade name, activities, Commercial registry, Partners & managers details.

Those applying through E-Services will require:

  • The online process does not require any additional documents
  • In-Person attendance with original ID to create an account on Dubai ID Smart pass (for those who don’t have existing account)
  • Details of the Trade name, activities, Commercial registry, Partners & managers.

What is the cost of an Instant License?

  • Payment Voucher: This includes the application fees, initial approval fees, trade name reservation fees and license issuance. The cost varies dependent on the activities but starts at approximately AED 9,000.
  • Sponsorship Fees: It is mandatory to have a local sponsor (a National Service Agent (NSA) for Civil Business or Sole Establishment or a 51% local partner for LLCs) for any mainland license in the UAE- sponsor fees depend on your individual agreement with said sponsor.


  • An investor can request for the establishment card to Dubai Immigration, once it is obtained, he or she can then apply for the residence visa.
  • Instant License is ideal for investors who just need a license and visa in the first year, but do not want to open a bank account or start business operations in the first year.

How Affiniax Partners Can Assist?

Affiniax can assist you in obtaining your Instant License in Dubai and can advise the best Method and the right activities for your company formation. To know more about Instant License setup and the full breakdown of all the relevant costs, please get in touch with us at

COVID-19: Accounting and Financial Reporting Considerations

Preparing Books of accounts during Covid-19

The outbreak of the Coronavirus (COVID-19) pandemic has had an adverse impact on the global economy and is affecting businesses of all sizes and sectors. Organizations around the world are facing challenges, often related to economic downturns, such as supply chain disruption, reduction in revenue, increasing inventory level, business closures, delay in expansion and tightening cash and credit conditions.

Considering such economic uncertainties, entities need to carefully consider their circumstances and risk exposures, revisiting their strategic business plan and assessing the impact the outbreak may have on their financial reporting.

This article highlights certain key accounting and financial reporting implications that may arise as a result of COVID-19 in the preparation of financial statements as per the International Financial Reporting Standards for the annual or interim reporting periods ending in 2020.

1. Going Concern Assumption
IAS 1 Presentation of Financial Statements requires management to assess a company’s ability to continue as a going concern. The going concern assessment needs to be performed up to the date on which the financial statements are issued. There may be significant areas of uncertainty due to COVID-19 and it could be important to assess the anticipated effects and impact of new information.

Management should assess whether disruptions caused by COVID-19 will be prolonged, resulting in a reduced demand for their products and services, liquidity shortfalls, among other possible repercussions, thereby assessing the appropriateness of the use of the going concern basis. When management is aware of material uncertainties that cast a significant doubt on the entity’s ability to continue as a going concern, the entity should disclose those material uncertainties in the financial statements.

If it has decided to either liquidate or to cease trading, or the company has no realistic alternative but to do so it is no longer a going concern and the financial statements may have to be prepared on another basis, such as a liquidation basis.

2. Events after the Reporting Period
IAS 10 Events After the Reporting Period contains requirements for when adjusting events (those that provide evidence of conditions that existed at the end of the reporting period) and non-adjusting events (those that are indicative of conditions that arose after the reporting period) need to be reflected in the financial statements.

With respect to reporting periods ending on or before 31 December, 2019, there is a consensus that the effects of the COVID-19 outbreak are the result of events that arose after the reporting date. If management concludes the impact of non-adjusting events are material, the company is required to disclose the nature of the event and an estimate of its financial effect.

If it cannot be quantitatively estimated in a reliable manner, there still needs to be a qualitative disclosure, including a statement that it is not possible to estimate the effect. Management should also consider whether it is able to properly assess as a going concern, if it cannot reliably quantify the effect of non-adjusting events.

3. Fair Value Measurements
Fair value measurement (FVM) is the exit price of an asset or liability on the measurement date from the perspective of a market participant as specified in IFRS 13 Fair Value Measurement

.Considering the market volatility, a key question is what conditions and the corresponding assumptions were known or knowable to market participants at the measurement date and not at a future date. The events or transactions occurring after the measurement date are only adjusted for in FVM to the extent they provide additional evidence of conditions that existed at the measurement date.

IFRS 13 Disclosures requires companies to disclose the valuation techniques and the inputs used in the FVM as well as the sensitivity of the valuation to changes in assumptions. Disclosures are needed to enable users to understand whether COVID-19 has been considered for the purpose of FVM or not.

4. Impairment of Non-Financial Assets
IAS 36, Impairment of Assets ensures that a company’s assets are carried at a value that is not more than their recoverable amount (the higher of fair value less costs of disposal and the value in use) and requires companies to conduct impairment tests when there is an indication of impairment of an asset at the reporting date.

Companies will need to assess whether the impact of COVID-19 has potentially led to an asset impairment. For most companies, the economic effects are likely to trigger an impairment test for long-lived assets, as well as other asset groups. Estimates of future cash flows and earnings are likely to be significantly affected by direct or indirect factors. Ongoing identification, evaluation and re-evaluation are essential to understand the extent of the need for recognition and for what periods. Considering the uncertainty in the current environment, disclosure of key assumptions and judgements made in estimating recoverable amounts are important.

5. Lease Accounting
IFRS 16 Leases requires a lessee to recognise a right-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments.

Impairment to ROU could occur due to the consequences of the pandemic and the lessee must test its ROU assets for impairment and shall recognise impairment loss (if any) as per IAS 36.

In the current environment, lessees may be seeking rent concessions from lessors. This may take the form of reduced or free rent for a period, a deferral of rent or some other type of relief (e.g. fixed rent payments becoming variable). The accounting implications of an agreed change to rent will depend on whether or not the change was envisaged in the original lease agreement.

The IASB has issued an amendment to IFRS 16 to make it easier for lessees to account for COVID-19 related rent concessions. The changes to IFRS 16 are listed below:

      • Provide lessees with an exemption from assessing whether a COVID-19 related rent concession is a lease modification, if the conditions stated in amendment are met.Requires lessees to disclose if the exemption is applied to all rent concessions, the nature of contracts to which it is applied and amount recognised as profit or loss to reflect the changes in lease payment.
      • Requires lessees to apply the exemption retrospectively in accordance with IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors but does not require them to restate prior period figures.

The amendment is effective June 1, 2020, but lessees can apply the amendment immediately in any financial statements (interim or annual) not yet authorized for issue.

6. Revenue Recognition
IFRS 15, Revenue from Contracts with Customers establishes the principles that an entity applies when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer.

COVID-19 could affect the assumptions made by management in measuring the revenue from goods or services already delivered, particularly for variable consideration and for the anticipated outcome of contacts extending over multiple reporting periods.

For example, reduced demand could lead to an increase in expected returns, additional price concessions, reduced volume discounts, penalties for late delivery or a reduction in the prices that can be obtained by a customer. A company may also modify its enforceable rights or obligations under a contract with a customer such as granting a price concession in which it is necessary to consider whether the concession is due to the resolution of variability that existed at the contract’s inception or a modification that changes the parties’ rights and obligations.

7. Onerous Contracts
An onerous contract arises when the unavoidable costs of meeting the obligations under the contract exceed the benefits expected to be received. If an entity has a contract that is onerous, IAS 37 requires the entity to recognise and measure the present obligation under the contract as a provision.

The provision for onerous contracts could be triggered in situations such as a revenue contract containing penalties for non-performance or an increase in costs associated with fulfilling a customer contract. Hence, entities should review their contracts to determine if there are any terms that may relieve them from its obligations without paying compensation. Contracts that can be terminated without paying compensation to the other party do not become onerous as there is no obligation.

8. Valuation of inventories
Inventories are measured either at cost or net realisable value (NRV), whichever is lower. Given the uncertainties in the current economic environment, it would be challenging for entities to determine NRV at the balance sheet date and conclude that NRV will recover before the inventory is sold. Hence, entities should assess the significance of any write-downs and make appropriate disclosures in accordance with IAS 2.

Also, the entities may experience changes in production level due to COVID-19 and will need to use judgement in determining what constitutes abnormal production levels. In case of abnormally low production, an entity may need to review its costing of inventories to ensure unallocated fixed overheads are recognized in profit or loss in the period during which they are incurred.

9. Financial Instruments – Classification, measurement and expected credit loss assessment

The classification of financial assets under IFRS 9 Financial Instruments is based on-

a) The entity’s business model for managing the financial assets; and

b) Whether the contractual cash flows of the financial asset are solely payments of principal and interest.

COVID-19 can impact the classification of assets where the entity’s business model for managing financial assets might have changed and it must reclassify all affected financial assets.

The potential deterioration in credit quality of individuals and entities due to the COVID-19 pandemic will have a significant impact on the expected credit loss (ECL) measurement. IFRS 9 requires an entity to incorporate reasonable and supportable information about past events, current conditions and the forecast of future economic conditions into the assessment of expected credit losses (ECL) for financial assets. ECL applies to trade and other receivables, loans, debt securities, contract assets, lease receivable, loan commitments and financial guarantee contracts.

The measurement of expected credit losses should be based on:

a) The information that existed at the reporting date and that is available without undue cost or effort;

b) An unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes; and

c) The time value of money. Entities should provide transparent disclosure of the assumptions used to measure the ECL and provide sensitivity disclosures.


Whilst the COVID-19 outbreak represents one of the biggest challenges ever to the world economy, companies should evaluate the related accounting issues and disclosure considerations discussed above and must continuously adapt to new and uncertain market conditions.