Applying financial reporting standards, especially in financial matters, is, more than ever, a crucial element at the end of the year. This is largely due to the economic instability of the post-pandemic period and the current geopolitical conditions, which have affected markets and supply chains in various regions of the world, including Mexico.
In the following article, we share some of the challenges that economic volatility and new accounting standards have brought, which companies must bear in mind as 2022 comes to an end:
- Impairment of long-lived assets – This issue and its level of complexity increased as a result of the pandemic, with new indicators of impairment. For example, there are assets that underwent unexpected changes merely as a result of the passage of time and are currently out of use. Therefore, it is important to mind any signs of impairment and it is necessary to check that the value of the assets does not exceed the expected (discounted) flows because if, in such case, it would be necessary to reduce the value of said assets.
- Volatility of interest rates – which generates instability in the market and, in turn, makes it more complex to measure fair value, which is the usual method for the valuation of certain items in financial statements such as: intangibles, inventories, fixed assets, financial instruments, among others. This occurs because this volatility generates subjectivity in any item valued using fair value techniques, because the assessment involves estimates and cash flows that are difficult to predict. Therefore, it is important to be adequately prepared to minimize the risks in these estimates.
- Leases – the date of the amendment that simplifies the accounting treatment of this type of relationship was extended to June 30, 2022, which implies that, if any leases received discounts during the pandemic, it is not necessary to reevaluate or restructure them. In other words, leases with suspensions or deferred payments will have to be evaluated under the scope of each applicable set of standards and its recent amendments, which currently simplifies the process. Other considerations involve the impacts on the movements of discount, inflation and exchange rates that could impact the lease liability at the end of the year.
- Changes in debt contracts – as a result of the pandemic, many banks made their services more flexible, changed their interest rates, extended their terms and even offered discounts, so it is important to consider the famous "10% test" indicated by the IFRS to see if it is necessary to write-off the financial liability and recognize a new one or continue with the same accounting treatment, provided that the difference between the original debt and the new one does not exceed 10%. If that percentage is exceeded, the contract must be adjusted in such a way that it virtually becomes a new document.
- Considerations for onerous contractual relationships – the scenario that has emerged is that compliance costs outweigh benefits, so costs must be recognized in a contract in which there are no profits, because with that knowledge it is possible to decide and act to maintain customers, despite losses; or pay the legal cost generated by the termination of the contract. A particularly important change for investors.