Companies will need to consider the impact of the COVID-19 pandemic on their operations when reporting on their financial status in their annual financial statements for the business year 2019 and in other periodical financial reporting this year, and possibly next.
The auditors on the other hand will need to choose the right approach for each company when signing off on companies’ annual financial statements for the year 2019 and 2020, which will not be an easy task.
1. What management is facing when preparing the annual reports for 2019
Annual financial statements need to be prepared in line with the rules defined in the Slovenian Companies Act (Zakon o gospodarskih družbah; "ZGD-1").
Annual financial statements and management report need to show a fair and honest representation of company’s assets and obligations, its financial position, and its profit and loss account. Additionally, the management report needs to explain (i) key risks and uncertainties the company is exposed to; (ii) all material business events taking place after the end of the business year; and (iii) expected growth going forward.
Most Slovenian companies were impacted by the COVID-19 pandemic in the year 2020 and will be required to explain in their annual financial statements how the pandemic affected their business operations and what consequences are expected on their business operations in the future. Realistic consequences will be harder to predict, considering the intervention measures of the state aiming to limit the spread of the virus and provide aid to the economy are still ongoing.
In most cases, accounting items have to be assessed under the `going concern´ (delujoče podjetje) assumption, which basically means that the company will continue with its operations in the foreseeable future. The main responsibility of properly assessing the `going concern´ assumption lies with the management. This assessment includes evaluation of future outcome of events and circumstances for the 12 months after the end of the business year at least and is made on the information available at the time it is prepared (ex ante).
If the management establishes that the company could not continue with its business operations due to the COVID-19 pandemic (or due to any other reason), the annual financial statements will need to disclose this fact and be prepared on the basis of the company being insolvent or going into liquidation (Slovenian accounting standards 39) .
In case the management establishes that it is acceptable to prepare the annual report based on the `going concern´ assumption, but important uncertainty due to the COVID-19 pandemic exists for the future, it will need to disclose this in the annual financial statements together with the impact of the COVID-19 pandemic on business operations and mitigation plans.
The liability of preparing the annual financial statements lies with the management and the supervisory board of the company. They are jointly and severally liable for the damage caused to the company, when breaching their duties, unless they can prove they acted with due care. Additionally, the company, management board and supervisory board of a listed company, are jointly and severally liable to the shareholders.
2. What guidelines auditors got from the European Audit Oversight Bodies and the Slovenian Agency for Public Oversight of Auditing
The Committee of European Audit Oversight Bodies and the Slovenian Agency for Public Oversight of Auditing (Agencija za javni nadzor nad revidiranjem) put additional pressure on auditors, by giving them a clear instruction that they need to comply with adopted standards when conducting audit proceedings despite challenges they are facing due to the COVID-19 pandemic.
The two oversight bodies stressed that auditors need to pay particular attention to:
- verifying the `going concern´ assumption,
- proper disclosures of the events taking place after the business year-end (eg. the COVID-19 pandemic), and
- proper assessment of the evaluation of the financial position and risks that arose amid the COVID-19 pandemic crisis.
How auditors will deal with these questions especially when signing off on annual financial statements for 2019 may cause tension between auditing firms and companies’ management. For example, a possible qualification in auditor’s report may, among others, have an impact on its stock price or put a company into default under existing loan agreements.
3. What extra duties listed companies have
3.1 Periodical financial reporting
Listed companies need to carry out periodical supervised financial reporting. In line with this, they need to prepare a half-year financial statements report and an interim management report together with the audit report, pursuant to the rules of the Market in Financial Markets Instruments (Zakon o trgu finančnih instrumentov; "ZTFI-1") and the Rules of Ljubljana Stock Exchange.
The half-year management report has to include a description of all material business events in the first 6 months and their influence on the financial statements with a description of important risks and uncertainties for the next 6 months. For not publishing the annual financial statements or carrying out periodical financial reporting in line with the law or not publishing the annual financial statements and audit report at all, a listed company is exposed to significant fines .
Companies listed on the prime market (prva kotacija) also need to prepare quarterly financial statements or key information on their business operations, such as changes in financial situation, changes in their forecasts, and commenting on uncertain events.
Listed companies will therefore have to carefully monitor and carefully consider the proper assessment of the `going concern´ assumption and the COVID-19 pandemic impact on their operations periodically in their financial reporting.
3.2 Disclosing inside information
Under the Market Abuse Regulation (Regulation (EU) No 596/2014 on market abuse; "MAR"), listed companies also have to publicly disclose inside information (among other concerning their financial position) directly concerning them as soon as possible. The Rules of Ljubljana Stock Exchange also define the information on their operations that should be disclosed by listed companies, especially for those on the prime market (prva kotacija).
Inside information is an information that would have an important influence on the stock price if it became public and a reasonable investor would consider it when making investment decision. The main criteria when deciding if inside information needs to be disclosed, is whether specific information will have an important influence on key items in financial statements or on important financial indicators (eg. interruption of operations, key changes in performing of company’s main business activity). This will be without any doubt relevant for listed companies whose operations were impacted by the COVID-19 pandemic. The impact on each company’s situation will need to be carefully assessed to rightly determine whether, and what kind of, disclosure is necessary.
Disclosure of the relevant inside information needs to describe the event, why it is relevant and the influence of this information on the stock price. It is recommendable that it is published together with a short assessment of the past operations, forecast and potential deviation from the past forecast.
3.3. Recommendations of the European Securities and Markets Authority and the Slovenian Securities Market Agency to listed companies
The European Securities and Markets Authority ("ESMA") has made several recommendations to listed companies and other financial market participants, in its initial statement on the COVID-19 pandemic dated 11 March.
ESMA’s recommendation on financial reporting is that listed companies provide transparency on the actual and potential impacts of COVID-19 pandemic, to the extent possible based on both a qualitative and quantitative assessment of their business activities, financial situation and economic performance already in their 2019 year-end financial statements, if these have not yet been finalized or otherwise in their periodical financial reporting disclosures.
The Slovenian Securities Market Agency (Agencija za trg vrednostnih papirjev; the "SMA") has followed ESMA’s lead and has published its first letter on 12 March, followed by the second letter dated 2 April, by giving the following guidelines to the listed companies:
- companies should assess the impact of the COVID-19 pandemic on their business operations and consequently on their stock price and disclose such information in line with the MAR;
- annual financial statements, which are being prepared during this time, must include information on the type and financial effects of material events (that is, the COVID-19 pandemic) that arose after the end of the business year; and
- to avoid panic on the stock exchange, it is recommended that companies publish information on how they are dealing with the situation, especially managing risks of decreased business operations.
3.4 Disclosing information on insolvency and insolvency proceedings
In the event a listed company becomes insolvent, because of the COVID-19 pandemic or otherwise, it has to publish this information immediately after the management has learned about the insolvency and reported it to its supervisory board pursuant to the Rules of the Ljubljana Stock Exchange. Ljubljana Stock Exchange withdraws the shares from the market only when the decision of the court on the start of bankruptcy proceeding becomes final.
A listed company needs to inform the Ljubljana Stock Exchange even on circumstances that may lead to or have led to insolvency or insolvency proceedings as soon as possible.
Further, it needs to publish the following information:
- if creditors propose a compulsory settlement proceeding over the company, immediately after the management has learned about it;
- if the company executed a court-sponsored restructuring agreement (pogodba o preventivnem prestrukturiranju) in line with the provisions of the Insolvency Act (ZFPPIPP),
- simultaneously with executing the agreement.
It is important to know that if a listed company becomes insolvent due to COVID-19 pandemic, it will need to immediately disclose and publish this information, even though it will not have a duty to file for an insolvency before 31 August 2020, and possibly before 30 September 2020 pursuant to the recently adopted Intervention Act .
Publishing this information will have a negative effect on company’s operations and stock price, even though the company may rescue its situation and become solvent within the given time frame due to reopening of the economy and the aid provided by the state. Therefore, it is recommended that company at the same time reports on plans and measures taken to prevent insolvency, to send a positive signal to the market at the same time and later on reports on initiated proceedings, outcome of negotiations with creditors and restructuring measures that were carried out.
 Fine of EUR 80k to EUR 500k can be imposed to a big or mid-sized company or higher. For a severe breach the fine is EUR 10m or 5% of the last published total annual turnover or twice amount of profit or loss caused by such breach, whatever is higher. A fine of EUR 8000 to EUR 10k can be imposed on a responsible person and for a severe breach a fine of EUR 2m or twice amount of profit or loss caused by the breach, whatever is higher. For not publishing the annual report or audit report at all, a fine in the amount of EUR 12k to EUR 500k can be imposed on a big and mid-sized company.
 Intervention Measures to Mitigate the Effects of the COVID-19 Infectious Disease Epidemic on Citizens and the Economy Act (Zakon o interventnih ukrepih za zajezitev epidemije COVID-19 in omilitev njenih posledic za državljane in gospodarstvo)