8th June 2020 – The forward-looking aspects of accounts will be more useful than a heavily adjusted measure of historical performance such as EBITDAC, or earnings before interest, tax, depreciation, amortisation and coronavirus, Moody’s Investors Service said today in a new report.
The European Securities and Markets Authority (ESMA) has called for caution regarding any separate presentation in the profit or loss statement of the impact of the COVID-19 pandemic, and has instead encouraged companies to explain the impact of the pandemic on the amounts actually recorded in that statement in a single note to the accounts. The Financial Reporting Council (FRC), which regulates auditors, accountants and actuaries in the UK, has also expressed concern about performance measures that attempt to provide a ‘normalised’ or ‘pro-forma’ result, excluding the estimated effect of the coronavirus.
“The provision of explanatory information is preferable to the introduction of a new metric such as EBITDAC,” said Trevor Pijper, Vice President – Senior Credit Officer. “EBITDAC would, of necessity, have to include a number of hypothetical and highly subjective adjustments for it to conceivably represent a ‘before coronavirus’ scenario,” added Philip Robinson, Vice President – Senior Credit Officer, co-author of the report. “The value of the metric would consequently be open to question.”
To inform its view of the credit quality of European non-financial companies, Moody’s will be paying particular attention to features in the accounts such as:
The directors’ justification for preparing the accounts on a going concern basis, as well as material uncertainties disclosed by the directors that might cast significant doubt upon the entity’s ability to continue as a going concern.
- The auditor’s response to the directors’ decision to use the going concern basis.
- Impairment tests, and the related disclosure of estimated future cash flows.
- Other forward-looking information, including the company’s ability to obtain cash and liquidity in the short-term, manage expenditure and take other actions to ensure its viability.
For more research and insight on the coronavirus (COVID-19) outbreak, please see moodys.com/coronavirus
