Uncertainty on uncertainty for NFPs

The recent reporting season has seen many Not-For-Profits (NFPs) ask the question ‘what impact will the COVID-19 pandemic have on my financial statements?’ The pandemic has significantly increased levels of uncertainty in the economy coupled with inherent levels of uncertainty in financial reports, leading to uncertainty on uncertainty.

While those charged with governance have battled hard to identify and respond to the impacts of the pandemic on operations, an increasing number of entities are now struggling to understand the impact that the pandemic has on their financial statements.

Below are the critical areas of financial statements which are being impacted by the COVID-19 pandemic, along with the response required by those charged with governance:

• Directors/Operations Report – those charged with governance must ensure their directors/operations report details the current impact from the pandemic (i.e. border restrictions, government funding) on the financial performance and position of the entity, in a manner in which users can comprehend and understand;
• Events After the Reporting Period – financial statements must include disclosure of the impacts on the entity post balance date and the extent to which these are known or uncertain;
• Going Concern/Solvency – notes to the financials should detail the impacts on going concern and management’s responses to any impacts noted. Enhanced disclosures are required if events or conditions are identified that may cast significant doubt on the entity’s ability to continue as a going concern;
• Estimates and Judgements – the pandemic has likely impacted key inputs and assumptions used in critical estimates and judgements, such as discount rates and future growth rates. All estimates and judgements need to be considered each reporting period and not simply ‘rolled forward from the prior year’;
• Loans and Receivables – recovery of loans and receivables has been pervasively impacted by the pandemic and this impact needs to be factored into any loss provisioning and disclosed appropriately in the financial statements;
• Property and Financial Assets – where assets are held at fair value, the underlying value may have been impacted by the pandemic. While the impact may not necessarily be negative, management are required to ensure that fair value calculations are appropriate given the current economic and market conditions; and
• Impairment – the assessment of impairment includes critical inputs, estimates and judgements which may have been significantly impacted. Management must assess whether any impairment indicators are present, consider whether impairment testing methodology is appropriate given the current economic conditions and disclose any impacts.

Regulators are looking for evidence that management and those charged with governance have documented their consideration and responses to the impacts of the COVID-19 pandemic on financial statements. In particular, the Australian Charities and Not-For-Profits Commission (ACNC) Governance Standard 5 details ‘The duties of Responsible Persons’, which requires charities to undertake reasonable steps to make sure that Responsible Persons are subject to, understand and carry out the duties set out in the standard.

It is critical that users of financial statements have the entire picture of the impact of the pandemic on entities’ financial performance and position. Even if the pandemic has not had a material adverse impact, users need to be able to understand this from their reading of the financial statements.

Please contact your local PKF office if you require any support or guidance.