Given the current situation that the global economy is facing due to the most recent coronavirus pandemic (Covid-19), which was declared by the World Health Organization on March 1, 2020, and the health emergency published by the Mexican Government on March 30, 2020, in the Official Gazette, the question arises if the current international and Mexican accounting regulations will allow companies to recognize the effects in their financial information due to the aforementioned pandemic.
The effects of Covid-19 on economic activity in Mexico are already occurring and are affecting several aspects of business entities. In some industrial sectors, due to their operations, companies are already experiencing the effects. For others, the effects will be imminent, and the financial information of companies will not be indifferent to reflecting the economic impacts of the pandemic during 2020 and/or 2021.
Some examples of the expected impacts that arise or will arise from the COVID-19 pandemic are:
- Disruption in the supply chain that causes production interruptions
- Reduction in sales, profit, or productivity
- Delays in the collection of the receivables
- Reduction or increase in the market prices of generic goods
- Temporary or permanent closure of facilities and sale points
- Reduction in staff availability
- Deferment or cancellation of improvements in facilities or planned expansion, liquidity crunch
- Difficulties in obtaining financing
- Increased volatility in the values of financial instruments, among others.
As a result, entities must pay special attention to the manifestation of potential signs of impairment in their assets recorded in their balance sheets, including those long-lived assets (tangible and intangible). The current economic situation is extraordinary in nature and undoubtedly generates additional pressure on the ability of entities to operate with the levels of profitability registered before the pandemic. It is likely that the value of these long-lived assets will be affected (downwards), as a result of the application of the Mexican accounting Bulletin C-15 Impairment in the value of long-lived assets and their disposal (Bulletin C-15). In this regard, observing the guidelines of Bulletin C-15 becomes crucial for entities, mainly for those that have significant investments of said type of assets as part of their processes of operation and/or manufacturing
It should be noted that the Bulletin C-15 has the following objectives: (a) provide the criteria that allow the identification of situations that show evidence regarding a possible impairment in the value of long-lived, tangible and intangible assets; (b) define the rules for the calculation and recognition of losses due to impairment in the value of assets (and their reversal); (c) establish the rules for the presentation and disclosure of assets whose value has impaired or its impairment has been reversed.
In essence, the aforementioned accounting Bulletin requires entities to recognize a loss in value when there are indications that the book value of a long-lived asset is greater that its recoverable amount.
The recoverable amount of and asset (or a cash-generating unit) will be the higher of its fair value less costs to sell it and/or its value in use.
- Fair value less costs to sell is the amount that can be obtained from the sale of an asset (or a cash-generating unit), in a transaction carried out in conditions of mutual independence, between interested and duly informed parties, less costs to sell or disposal by other means.
- The value in use is the present value of estimated future cash flows expected to be obtained from an asset (or cash-generating unit) taking into account its current state.
If any these amounts exceed the book value of the asset, it would not have suffered an impairment in value, and therefore it would not be necessary to estimate the other value. Conversely, the book value of an asset will be reduced until it reaches its recoverable amount if, and only if, this recoverable amount is less than the book value. This reduction is called an impairment loss and will be recognized immediately in the P&L of the period.
It is worth noting that the application of Bulletin C-15 is mandatory for privately owned entities that are audited in Mexico, at the end of the (intermediate) reporting period under review, when there are indications of impairment in the value of an asset.
It is also important to mention that, last June, the Mexican Council of Financial Reporting Standards, A.C. (CINIF) has circulated the NIF C-15, Impairment in the value of long-lived assets, for discussion purposes (the period ended on September 23, 2020), which pursues two specific objectives:
- Update the current Mexican accounting bulletin, considering international standards
- Standardize the disclosures on impairment losses and their reversal derived from the aforementioned update
It is contemplated that said new NIF C-15, will come into force for annual periods beginning on January 1, 2022, allowing its early application. In any case, our recommendation is to be alert to the issuance of the final document once it is published.
The guidelines and calculations involved in determining the recoverable amount can be considered complex and specialized in nature, depending on the business or industry where entities operate. In this respect, at Mazars and ArCcanto we have the knowledge and experience through our specialists who can help you assess the impacts of the pandemic on your long-lived assets, in addition to advising you when estimating recoverable amounts, if there are obvious signs of potential impairment and, where appropriate, support you in determining and recognizing the potential loss due to impairment in your financial information.
This article was written by Jorge Villanueva, Partner at Mazars and Víctor Vázquez, Partner at ArCcanto. Mazars has a strategic alliance with ArCcanto.
ArCcanto is a consulting firm, specialized in corporate finance and non-traditional financing. ArCcanto has been a strategic ally for companies during the last 16 years, that facilitates the growth of these until they are sold, merged or go public. If you want to know more about ArCcanto go to their website here.