Post Balance Sheet Events and Provisions
For most companies, the impact of Covid-19 has already featured in their 2019 financial statements as a post balance sheet event disclosure. However, as we approach the end of 2020, the year in which we will start to see the impact of the pandemic reflected on profit and loss accounts and balance sheets on mass for the first time, it is a good time to consider how post balance sheet events and indeed provisions might impact and if there is potential to manage these impacts favourably.
Post balance sheet events
Lets firstly discuss post balance sheet events which are defined as, “Events that occur between the Balance Sheet date and the date the financial statements are approved by the Directors.”
Where significant post balance sheet events occur, they will fall into 2 categories:
- Non-adjusting Post Balance Sheet Events – A condition that did not exist at the Balance Sheet date. In this case, no adjustments are required to the amounts contained within the financial statements, but disclosure will most likely be required.
- A major acquisition or disposal of a subsidiary post year- end;
- Implementation of a major restructuring post year- end;
- Commencement of major litigation post year-end;
- Announcement of a plan to discontinue certain operations post year-end;
- Entering into significant financing commitments post year-end;
- Breach of Bank loan covenants post year-end.
- Adjusting Post Balance Sheet Events – Where the additional information we have now relates to conditions that existed at the Balance Sheet date. In this case adjustments to the figures and/or disclosure may be required in the financial statements.
Some scenario’s to consider:
A debtor goes into liquidation – they owe €100K at 31 December 2020 and €250K when they go into liquidation in 2021?
Generally, only the €100K should be provided for as the additional sales that increased the amount due presumably only took place in 2021 and therefore did not exist at the balance sheet date. However, the contractual arrangement would need to be considered to confirm this.
An investment property was valued at €2M at 31 December 2020, but before the financial statements are approved by the Board, its value has now fallen to €1.5M. Again on the presumption that the devaluation relates only to conditions that occurred after 31 December 2020, then the asset would be carried at €2M, with possible disclosure as a significant Non adjusting post balance sheet event.
Breach of Bank Loan Covenants
In this scenario, the full amount of debt shown must be shown as short-term creditors with relevant disclosures unless:
- The breach only relates to post year-end covenant periods (not submission dates for covenant reporting).
- Bank agrees to issue a waiver before year-end.
The impact of this can be particularly significant as it can create a solvency issue, and also impact on credit advanced by suppliers, so if there is an issue it is critical to engage with the bank before year end.
Dividends – Another important planning area!
- Dividends approved by the Directors, but not paid by the year-end cannot be included in the financial statements.
- Dividends approved by the shareholders, thus creating a constructive obligation, will be included in the financial statements regardless of when they are ultimately paid.
Where it is concluded that a company is no longer a going concern after the balance sheet date, this will always be an Adjusting Post Balance Sheet Event.
Provisions – “A liability of uncertain timing or amount”
- An extensive area, but can be summarised as follows:
- Probable – >50% likelihood company will have to pay out – Provide and disclose
- Possible – <50% likelihood company will have to pay out – Disclose only
- Remote – Do nothing
- Be mindful of onerous contracts and their impact on the financial statements –for example, an unused premises could result in a provision for the full amount of the remaining lease term in this year’s financial statements.
- Restructuring provisions can only be included once they have been formally communicated to those affected by them and there are specific rules governing what costs can be provided for.
- In contrast, a contingent asset, for example, a business interruption insurance claim can only be recognised in the financial statements when it is virtually certain that it will be received
Additional Planning and Risk Management opportunities to consider
- Restructuring existing corporate structures to separate/amalgamate different business operations from a risk management perspective.
- Consider whether merging related companies might achieve synergies and planning opportunities.
- Consider structures and where they could be tidied up through dissolving unnecessary companies.
- Be mindful of excess cash reserves on balance sheets from a risk and potential exposure to negative interest perspectives.
In summary, Post Balance Sheet Events and Provisions will have a substantial impact on the financial statements but are very much centred around the balance sheet date presenting us with the opportunity to manage them favourably with proactive planning.