In an increasingly complex and volatile global scenario, geopolitical, macroeconomic and socio-political changes can have a very significant impact on the closing of companies’ accounts. Adequately incorporating the impacts of unexpected situations is essential to guaranteeing the transparency and integrity of financial statements.
In this article, we will discuss some of the main (non-exhaustive) impacts that should be considered in the process of closing the accounts for the 2024 financial year, particularly taking into account the current context in Mozambique.
Impairment
In the current context, it may be necessary to carry out impairment tests on various assets, in particular tangible fixed assets (due to possible loss of value as a result of vandalism or climatic phenomena), accounts receivable (due to the risk of increased liquidity problems with customers who may have seen their operations affected by recent events), inventories (due to acts of vandalism or theft), goodwill (due to loss of business value) and deferred tax assets (due to a reduction in the company’s ability to generate future tax results that allow them to be recovered).
In addition, attention must be paid to the assumptions used in impairment analyses (such as discount rates and inflation rates), which will tend to deteriorate, as well as the basis for projections (such as growth rates and margins) where projections are typically based on historical data, which may not be adequate, increasing the uncertainty arising from a lower degree of predictability about market behaviour.
In the specific case of the banking sector, given the specific nature of its financial assets and their relevance to its balance sheets, particularly in terms of loans and advances to customers and financial assets at amortised cost, the process of reviewing impairment losses associated with these assets is even more complex as a result of the fact that financial institutions are reporting in accordance with the International Financial Reporting Standards (IFRS).
It is essential that the process of closing the accounts and preparing the financial statements and respective notes is carried out in a timely manner, and that analyses of unexpected events and their impacts are strengthened before the accounts are closed
In the current context, it is expected that the models used by banks to recognise impairments on these assets will be affected, with upward revisions of the respective accumulated impairments, as a result of changes in the main forward looking variables incorporated into the respective models, such as Gross Domestic Product, inflation rates, interest rates, etc., as well as the increased risk associated with the respective credit and securities portfolios – the latter also affected by the rating of the Republic of Mozambique established by the main international rating agencies (some of which are already forecasting downward revisions).
Physical Counts
In the event that companies have been unable to carry out their usual physical counting procedure, due to a lack of available technicians or the difficulty or impossibility of accessing the premises, alternative procedures should be identified to be carried out subsequently, in order to be able to finalise the verification of stocks and inventories on the closing date and make any adjustments that may prove necessary.
Insurable events
In the event that the company has losses on assets that are covered by insurable events, it will be necessary to ensure that compensation is payable, bearing in mind that acts of vandalism or theft may not be covered. It is therefore necessary for the company to obtain proof in order to claim compensation, in particular through written confirmation from the insurer.
In the specific case of insurance companies, the process of closing the accounts for the 2024 financial year will offer even greater complexity in terms of determining the cost of claims associated with all the events that occurred (covered by the respective policies) up to the end of the year, taking into account the size of the events that occurred close to the date of closing the accounts, in order to determine the cost of claims incurred but not reported to the company (IBNR).
In this context, insurance companies should carry out an early analysis with clients who incorporate this cover in order to gather the best information available for determining and recognising any additional estimates of claims costs.
Information is important for confidence in the economy
Disclosures
Disclosures will also have various impacts, some of which will only be improvements, while others will require additional publications.
Some of the improvements could be
- Improved description of the rationale for changes in assumptions in estimates, as well as on any contingencies and/or provisions recorded;
- Detailing the indemnities recorded or disclosing the rationale for contingent assets that may result from potential indemnities.
Some additional disclosures will be:
- A description of the situation and impacts on the company’s continuity of operations, with a need to address the events that have directly affected the activity, but also its environment (namely on customers and suppliers and their ability to continue operating, on access to external credit or shareholder support, among others). These disclosures must be supported by prior analyses with operational and cash flow projections to corroborate them;
- For events after the balance sheet date, it will be necessary to create a specific note describing the impacts that the company may have suffered subsequently (very much in line with what has already occurred during covid-19). A prior assessment will be needed as to whether these will be adjustable events or only disclosable ones;
- Disclosure of any other unusual event such as a cyber-attack, fraud or other, depending on the specifics of each company – it should be emphasised that companies should improve their mechanisms for subsequently analysing these potential events, the likelihood of which increases in scenarios such as those seen in Mozambique since October 2024.
Conclusion
To summarise, and the article does not intend to exhaustively address all the possible impacts that could arise from the current context, it is essential that the process of closing the accounts and preparing the financial statements and respective notes is carried out in a timely manner. It is important to step up the analysis of unexpected events and their effects before the accounts are closed, in order to identify and obtain the necessary information on all the impacts that need to be recorded or disclosed.
It is essential that this work is carried out with rigour, involving local teams, shareholders and their respective groups, where applicable, in order to guarantee the integrity of the financial information. This process has enormous relevance not only for the shareholders and stakeholders specific to each company, but more broadly, given the importance of robust financial information for confidence in the country’s economy and in the markets as a whole.
