It may seem that the effects of the COVID-19 pandemic are not revolutionary for the accounting, as a system of recording transactions performed by business entities, in any way, in the sense of new accounting methods or principles. What is unique and unprecedented in modern history, however, is the extent of the effect of the pandemic on society and its influence on the business of all economic entities, regardless of their field of business. It is mainly the speed, with which the economy stopped, and the period of time, for which it stopped. Some fields stopped completely, either due to the supplier/customer chain having stopped, due to shortage of labour or other limitations performed not only by the government of the Czech Republic but also by governments of other countries worldwide.

This situation has caused problems in many companies, which they never had to worry about previously, and therefore they also had no prepared procedures for how to handle this crisis situation. As a result of this fast crisis, many companies have begun to work on a more detailed “survival” strategy and elimination of the negative effects of the pandemic, for which they need relevant information on the current state of society. And this is where the accounting department comes into focus, which is under pressure to process accounting documents more quickly and to create analyses that serve for managerial decisions, among other things.

In the following lines, we will present selected areas more closely, to which companies should pay increased attention in connection with the pandemic. Although there has been no change of accounting method, there may have been a change in the situation and risks, to which the accounting needs to react as well.

Analysis of receivables and payables past maturity

The accounting department should compile an analysis of unpaid receivables more often, which are often not paid within the agreed deadlines as was usual, due to the limitation of production and business activities. The cause may be either in the economic situation of the business partner, or in the limitation of activities of administrative staff (employees, who prepare payments and persons approving them) due to quarantine or another internally limited regime of performing work in the individual companies.

The analysis of unpaid receivables should be performed regularly not only from the perspective of a potential dunning procedure, which is common practice in all companies, but also from the perspective of assessing the financial standing of clients and their future ability to pay these receivables. Evaluating the analysis of unpaid receivables may lead to the need to reduce supplies to non-paying customers and to sending reminder letters in relation to unpaid receivables, as well as to the need of accounting provisioning for the receivables. Provisioning should adjust the nominal value of receivables to a value that the company will realistically be able to recover. A corresponding value of receivables, i.e. a realistically collectible value, is necessary for compiling the cash-flow plan as well.

The analysis of unpaid liabilities is the second analysis necessary, because your unpaid payables are one of the factors, based on which your business partners perceive you. In the same way that a company proceeds to dunning unpaid receivables and reducing supplies of production materials necessary for production and provision of services to clients, your business partners make the same moves regarding any unpaid liabilities of your company. In case you will not pay your payables, your suppliers may reduce business relations (supplies), which may lead to further phase-out of business activities of the company. Not to mention the possible risk of late payment interests and potential related lawsuits, on both sides of the business relation.

Cash-flow planning

Many companies do not commonly prepare a cash-flow plan and the companies that do so often only prepare it once a year, which now may not be sufficient. In the current quickly changing situation, the management of a company needs to assess the financial situation of the company regularly.

Based on the compiled analyses of current receivables and payables and planned investment and non-investment purchases and sales in future periods, the company should prepare cash-flow plans regularly, i.e. the value of payables that will need to be paid and the value of receivables that are planned to be collected, and should finance the payment of payables. The company may observe only the natural development of cash-flow in a simplified way and can perform corrections and interventions based on this observation. It is important not only to compile the cash-flow plan carefully, but also to evaluate it retrospectively. In case a significant deviation from the planned cash flow occurs, this situation needs to be resolved urgently.

There are several ways of correcting the cash-flow development, from deferring some payments, to various loans and borrowings and contributions from partners, and up to complete restructuring and cost optimising. One of the options in connection with COVID-19 is also the use of state support in the form of subsidies.

State support – subsidies

This form of support of business entities is not out of the ordinary. Many business entities have experience with subsidies provided through European funds, the labour offices and other entities. On the other hand, though, there is still a high number of companies, which have no experience with subsidies and with entering them in the accounting. For an accounting department that has not encountered accounting subsidies in practice, entering a subsidy in relation to the pandemic into the accounting may represent a great burden. When preparing the relevant documents (questionnaires, statements etc.) for the institutions providing the given subsidy, when setting up the accounting system, and also on the level of entering the drawdown itself and related transactions in the books. The interpretations issued by the National Accounting Council, which deal with this issue among others, may also represent suitable inspiration (guide) for capturing received subsidies in the accounting in the correct way. 

Due to possible subsequent audits of the use and reporting relating to transactions connected to a subsidy, it is necessary to set up processes well and to comply with them consistently, which, in a situation, when some limitations in performing work occur, is all the more challenging.

Accounting reserves

In addition to analyses on the level of accounting, it is also necessary to identify potential risks relating to the given type of business in order to compile a strategy for managing a company. Risks may be of a general nature common for all types of business, specific ones relating only to particular fields, or individual ones relating only to the given company. From this perspective, it is necessary to cooperate with the management of the company and with technical staff, who can detect these specific risks and calculate the value of reserve for covering these risks. From the perspective of the accounting department, this information is not always commonly and regularly available. We know from practice that dealing with reserves for risks is in most cases an unpopular activity performed only when compiling the annual financial statement. For managing a company and competent decision-making, however, regular identification of risks and calculation of their possible effect on the company is very important and underestimating it may sometimes have immeasurable impact on the company.

This importance is enhanced further in connection with the COVID-19 pandemic, because the risks related to it continue to develop and may be new for a company.

Accrued costs and revenues

Same as in the case of reserves, creation of accrued costs and revenues is mostly being left until the compilation of the financial statement. But these entries also have a significant effect on the development of profit/loss in the course of the accounting period and correct identification and evaluation provides a more complex view of the situation of the company in the course of the accounting period. In case uninvoiced supplies are not entered in the books continuously, the concurrent economic situation of the company may be distorted and in connection with it, the management of the company might make inadequate decisions. Under the influence of the COVID-19 pandemic, the process of compiling an accounting of tax document (invoice) may be much longer than habitually, and the need for creating accruals is therefore higher.

In addition to the above-mentioned detailed accounting analyses related to eliminating negative impact of the COVID-19 pandemic, we recommend to companies to verify the financial standing of new as well as their current clients. We recommend performing a verification more frequently than used to be common in companies.

Adjusting and non-adjusting event in the financial statement

In practice, we often encounter the question from clients, if the pandemic and its effects should not be reflected in the financial statement of the company in any way, i.e. if this was an adjusting or a non-adjusting event. The potential effects of the pandemic on the accounting may be provisioning (for receivables, assets), reserves, decrease in the value of inventory, and in an extreme case an interruption of the going concern assumption. The going concern or continuous life of an accounting entity is understood to mean not only the legal, but also economic life in the near future, generally for the period of 12 months following balance sheet date, as of which the financial statement is compiled.

So what is the effect of the pandemic on the financial statement of a company then?

In case the accounting period of a company is a calendar year, the effects of the pandemic are not an adjusting event from the perspective of the financial statement compiled as of 31 Dec 2019, due to the fact that these effects did not exist as of balance sheet date. In case the date of compilation of the financial statement is after the declaration of the state of emergency in the Czech Republic, the company should only inform in a supplement about the potential effects of the pandemic on the company and its activities in the subsequent period, especially the impact on the going concern assumption.

In case the accounting period of the company is the economic year, from the perspective of the impact of the pandemic of the financial statement the crucial thing is, when this economic year ends.

• The COVID-19 pandemic will be assessed as a non-adjusting event after balance sheet date, in case the state of emergency due to the COVID-19 pandemic occurred after balance sheet date, but before the compilation of the financial statement. In this case, the company should only inform in a supplement about the potential effects of the pandemic on the company and its activities in the subsequent period, especially the impact on the going concern assumption.
• In case the company has the balance sheet date after the state of emergency had been declared, the impact of the pandemic event will not be a post-balance sheet event, but an event of the current accounting period. The company should therefore also enter this impact in the books and post it in the financial statement, e.g. reflect accrued costs related to the pandemic, create reserves for related potential risks and so on.

Much as the COVID-19 pandemic may seem unclear and stressful, from the perspective of processing the accounting, the situation is clear and respects applicable principles and rules that have been known for a long time. Here, at least, we can be sure that no surprise awaits us, if we perform accounting in compliance with the rules and on the basis of relevant information about the current situation.

We wish companies a speedy recovery from the pandemic and we would also like to contribute to this recovery. If you have any questions regarding accounting or tax matters relating to the pandemic, feel free to turn to us.

Karolina Vernerová
Jan Vácha