covid-19 – our outlook isn’t what it was…

There’s no shortage of available commentary on going concern implications of covid-19…

…whether from preparer or auditor perspectives. In some cases, the pandemic will have exacerbated pre-existing conditions; in others, a previously sound business model and cash flow situation may have been decimated. Poor Cineplex Inc. provides a prime Canadian example of changing fortunes. Its annual statements for December 31, 2019, issued with an auditors’ report date of February 11, 2020, made no mention of going concern uncertainty, and didn’t even mention covid-19 as a subsequent event. By the time of the March 31, 2020 interim statements, approved by the board on June 29, 2020, things had changed precipitously. I’ll devote most of today’s post to some extracts from the disclosure:

  • On March 16, 2020, Cineplex announced the temporary closure of all of its theatres and LBE (location-based entertainment) venues across Canada… On April 1, 2020, in response to applicable government directives and guidance from Canadian public health authorities, Cineplex announced that the closure of its theatres and LBE venues across Canada would remain in effect and that the reopening of such locations would be reassessed as further guidance is provided by Canadian public health authorities and applicable government authorities.
  • To mitigate the negative impact of COVID-19 and support its long-term stability, Cineplex has taken a variety of measures including:
    • temporary layoffs of all part-time and full-time hourly employees as well as a number of full-time employees who chose a temporary layoff rather than a salary reduction;
    • reducing full-time employee salaries by agreement with such employees;
    • suspending or deferring current capital spending and reviewing all capital projects to consider either deferral or cancellation;
    • reducing non-essential discretionary operational expenditures (such as spending on marketing, travel and entertainment);
    • implementing a more stringent review and approval process for all outgoing procurement and payment requests;
    • proactively negotiating with landlords for rent relief, including abatements and converting fixed rent to variable rent depending on attendance, until attendance returns to previous levels;
    • working with major suppliers and other business partners to modify the timing and quantum of certain contractual payments;
    • reviewing and applying for government subsidy programs where available, including the Canada Emergency Wage Subsidy;
    • continuing the suspension of dividends; and
    • focusing on revenue driving opportunities including the expansion of Cineplex Store offerings and expansion of food home delivery from theatres and LBE venues.
  • Due to the uncertainty of the timing of the reductions of many government-imposed restrictions and the potential long term effects that the COVID-19 pandemic may have on the exhibition and amusement and leisure businesses, COVID-19 may have a prolonged negative impact on Cineplex’s operations. With the unknown duration of the pandemic and yet to be determined timing of the phased complete reopening of Cineplex’s businesses, as well as consumers’ future risk tolerance regarding health matters, it is not possible to know the impact on future results. However, Cineplex is optimistic that the exhibition and amusement and leisure industries will recover over time. Cineplex believes consumer demand for the theatrical experience combined with a backlog of anticipated releases of strong film content will help drive visitation, and that LBE activities will increase as people seek out-of-home experiences they have been restricted from enjoying since mid-March…

Overall, after providing further detail on its financial condition, the company concluded that the various material uncertainties “lend significant doubt about the Company’s ability to continue as a going concern and, accordingly, the appropriateness of the use of accounting principles applicable to a going concern.”

On a related topic, it’s worth remembering the following IFRIC agenda decision from 2014:

  • …the Interpretations Committee discussed a situation in which management of an entity has considered events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. Having considered all relevant information, including the feasibility and effectiveness of any planned mitigation, management concluded that there are no material uncertainties that require disclosure in accordance with paragraph 25 of IAS 1. However, reaching the conclusion that there was no material uncertainty involved significant judgement.
  • The Interpretations Committee observed that paragraph 122 of IAS 1 requires disclosure of the judgements made in applying the entity’s accounting policies and that have the most significant effect on the amounts recognized in the financial statements. The Interpretations Committee also observed that in the circumstance discussed, the disclosure requirements of paragraph 122 of IAS 1 would apply to the judgements made in concluding that there remain no material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern.

That is, if the assessment was a “close call,” then disclosure is required. One consequently sometimes comes across disclosures which at first glance look like going concern uncertainty disclosures, in that they constitute a big block of text in which the term “going concern” jumps out, but which on closer examination are actually explaining why significant doubt wasn’t identified in this regard. Covid-19 will presumably substantially increase the incidence of this kind of situation (and of regulatory scrutiny on them)…

The opinions expressed are solely those of the author

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