The Factiva database was consulted to identify the 100 largest listed airlines in the world based on the latest available market capitalization and the Dow Jones Industry Classification with the code airlines on 8 April 2021. The financial statements which were available as per 1 May 2021, either on the website of the airline or the website of the regulator, are included in this research. Furthermore, this study selected those financial statements that are prepared in accordance with IFRS-International Accounting Standard Board (IASB), IFRS-European Union (EU) or United States Generally Accepted Accounting Principles (US GAAP) and includes an auditor’s report.

The main activity of the sample relates to passenger airline business given the unprecedented adverse impact of this specific industry. Airlines which have their main activities in cargo, lessor airline activities, airline manufacturing or private jet airlines were eliminated from the population to create a sample with comparable (adverse) market circumstances. Finally, airlines were selected with financial year reporting dates between 31 December 2020 and 31 March 2021 to analyze the effects of COVID-19 on the financial statements for a comparable period.

This resulted in a research population of 24 financial statements, 10 North American airlines, 8 European airlines (including the United Kingdom and Turkey), 3 Chinese airlines (including Hong Kong), 2 Middle East airlines and 1 airline from South America. The total assets of this sample amounts to €505.652 million and the total equity amounts to €59.062 million. For further details regarding the names of the companies and financial data, we refer to appendix 1. We conclude with the observation from appendix 1 that the total revenue of the population decreased with 60% compared to the previous year which illustrates the enormous impact of COVID-19 for this specific industry.

The population consists of airlines which apply either IFRS (as published by the IASB and/or endorsed by the EU) or US-GAAP. We analyze in this section whether the sets of standards are comparable for the elements we include in our study.

The specific elements compared for the accounting standards are going concern, rent concessions, significant judgements and estimates, impairments and governmental support, and auditor’s opinion.

Under both accounting standards going concern needs to be disclosed in the financial statements when there is significant doubt on it (IAS 1.25 & Accounting Standards Codification (ASC) 205-40-50-1).

International Financial Reporting Standards prescribes that significant judgements and estimates should be disclosed (IAS 1.122 & IAS 1.125). US-SEC registrants should provide a discussion of critical accounting policies and estimates as part of item 303 (Management’s discussion and analysis of financial condition and results of operations) of Regulation S-K.

In this research we pay attention to governmental support which could be governmental assistance (IAS 20), a form of relief or deferment of income tax payments (IAS 12) or funding (IAS 32/ IFRS 9). The US accounting standards do not provide specific guidance for governmental grants to profit entities but refers to ASC 958 (Not-for-Profit-entities) in which disclosure requirements are given for contributed (non)-financial assets which are comparable with requirements given in IAS 20 paragraph 39. In the United States a $2.2 trillion economic stimulus bill was signed into law on March 27, 2020, in response to the economic fallout of the COVID-19 pandemic. This CARES (Coronavirus Aid, Relief, and Economic Security) Act included specific provisions to provide payments to passenger air carriers amounting to a maximum of $25 billion that had to be exclusively used for the continuation of payment of employee wages, salaries, and benefits. In addition, the CARES Act also provides assistance in the form of loans, grants, tax credits, or other forms of government aid. The accounting treatment of these programs follows the same principles as in IFRS with the most important distinction whether the transaction with the government is an exchange transaction (a reciprocal transfer in which each party receives and pays commensurate value) or a contribution. This will determine whether the scope of the program is in IFRS 9 (e.g. funding), IAS 12 (income tax relief) or IAS 20 (non-reciprocal government support), a combination³ or the US-GAAP equivalents of these standards. It is obvious that the nature of the program or transaction with the government should be disclosed under both IFRS and US-GAAP.

The Financial Accounting Standard Board (FASB) staff issued a question and answer (Q&A) in which guidance is provided for rent concessions which do not qualify for a lease modification. This FASB staff question-and-answer document focuses on the application of the lease guidance in Topic 842, Leases for lease concessions related to the effects of the COVID-19 pandemic. For concessions related to the effects of the COVID-19 pandemic, an entity will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and can elect to apply or not apply the lease modification guidance to those contracts. On 28 May 2020, the IASB issued a similar election (a practical expedient) but only for lessees. According to this expedient a lessee may elect not to assess whether a COVID-19 related rent concession is a lease modification (IFRS 16.46A, IASB 2020). This option or expedient will allow rent concessions to be recognized in the period to which the concession relates. If the normal modification stipulations would have been followed the concessions would often have been spread over the remainder of the lease period. Thus, by making use of the expedient a better matching could be reached between the benefits of the rent concessions (for lessees) and the adverse financial effects caused by the pandemic.

Regarding the determination of impairment of goodwill, intangible and tangible assets guidance differs between US-GAAP and IFRS. According to US-GAAP an entity uses a two-step impairment testing model for tangible assets and finite-lived intangibles, while under IFRS, an entity must use a one-step model. Under both sets of standards, an entity must use a one-step model for testing goodwill and indefinite-lived intangible assets; however, under US-GAAP, an entity can use an optional qualitative assessment. Under both IFRS Standards and US-GAAP, assets may be tested as a group or individually, depending on whether largely independent cash flows attributable to the assets exist. The groupings may differ under IFRS Standards and US-GAAP owing to how they are defined.

If we consider the most important research topic of this study, the quality of disclosures, it is important to note that the impairment disclosures for goodwill, intangible and tangible assets are comparable between US-GAAP (ASC 350 and ASC 360) and IFRS (IAS 36). Given the differences in setting up the impairment test, it could be theoretically possible that an airline company reporting under US-GAAP would not record an impairment loss due to the qualitative assessment, not existing under IFRS, and therefore will not have to disclose any impairment loss. However, a qualitative assessment means that an entity is permitted to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. It is obvious that this assessment during the pandemic crisis would fail, meaning that the entity is obliged to perform a quantitative impairment test that would also be required if IAS 36 would have been applied.

Given the fact that we might expect impairment losses for economically similar airline companies under both GAAPs and considering the similarity of impairment disclosures for goodwill, intangible assets and tangible assets, we consider US-GAAP and IFRS comparable for the aim of this study.

Regarding the auditor’s opinion the International Auditing and Assurance Standards Board (IAASB) and Public Company Accounting Oversight Board (PCAOB) request the auditor to disclose matters which are material to the financial statements and have a subjective or complex auditor judgement (International Standard on Auditing (ISA)706 and Auditing Standards (AS) 3101). Also, the auditor’s responsibilities in the audit of financial statements, relating to management’s use of the going concern assumption in the preparation of the financial statements, under which adding a going concern related emphasis of matter paragraph to the unqualified opinion, are comparable (ISA 570, AS 2415).

Though in literature it is admitted that the scope of a PCAOB/AS 3101 ‘critical audit matter’ (CAM) could be more narrow than a key audit matter (KAM) under ISA 706 (Jermakowicz et al. 2018), we conclude that both key audit matters and critical accounting matters emphasize the elements of the financial statements which are critical for the reader The impact of COVID-19 is without any doubt a critical or key audit matter related to auditing accounts or disclosures that are material to the financial statements. Hence, we consider these two sources of guidance comparable for the aim of this research.

As indicated earlier, the passenger airline companies are situated in a distressed environment. The responsibility of the auditor to report on going-concern related uncertainties is expected to be challenging in these circumstances. If an auditor issues an unqualified audit opinion and/or refrains from issuing a going concern emphasized audit opinion and the audited company subsequently fails, the cost to the auditor in terms of increased litigation costs and loss of reputation are often substantial (Carcello and Palmrose 1994; Geiger et al. 2020). In this research, we focus on how many airlines include a going-concern paragraph in accordance with IAS 1.125 or ASC 205-40-50. Subsequently, we compare whether the auditor included a material uncertainty relating to going concern (MURG) in his opinion when the financial statements contain a paragraph in which material uncertainties related to going concern are included.

The disclosure of key audit matters (KAMs) is an important section of the auditor’s opinion and is relevant for the users of financial statements (Gold and Heilman 2019). Auditors should carefully weigh which matters they disclose as key audit matters in their reports. We expect that COVID-19 related matters will be identified as key audit matters.

We further note regulators identified recommendations on the auditor’s report and going concern paragraph, e.g., the Royal Netherlands Institute of Chartered Accountants (NBA 2020). Also, the PCAOB states that the significance of the impact of COVID-19 may warrant including additional elements in the auditor’s report, such as explanatory language or an explanatory paragraph when there is substantial doubt about the ability of the company to continue as going concern (PCAOB 2020).

Finally, in line with (Brouwer et al. 2016), we will investigate, in the context of the COVID-19 matters, the (two sided) relationship between identified key audit matters in the auditor’s opinion and the significant judgements and estimates paragraph in the financial statements. One might expect that COVID-19 matters identified as KAM are also included in the significant judgements and estimates section. This expectation also holds for the other direction. Once identified as a significant judgement or estimate, we might assume that this matter is rather part of the key audit matter section.

The financial statements which are prepared on US GAAP are all headquartered in the United States of America. Based on the CARES Act, the US government provided for specific time periods tax reliefs for passenger airline ticket taxes, social security contributions, extension of tax compensating net operating losses to the preceding periods (tax loss carry backs), fuel taxes and federal transportation taxes.

The identification of which tax support programs are applicable for the financial statements based on IFRS in our research sample is more complicated because the airlines are widespread over different (tax) jurisdictions. For this reason, we have identified categories based on disclosure requirements in IAS 12, IAS 20, and IAS 32.

We categorized the support of governmental support in four categories: governmental guarantees, governmental tax relief or deferment, operating grant(s), and governmental loans, refer to Table 5 for a complete overview.

We observe that four airlines recognized governmental income which was provided to guarantee certain flight routes in China (three airlines) and one for air services by SAS airlines for domestic routes in Norway. We cannot determine whether these are directly linked to COVID-19, but we consider it almost certain that this support would not have been provided without COVID-19. We understand that the CARES Act was also endorsed to guarantee the continuation of certain flight routes, but the governmental support related to this support program was not separately disclosed in the nine US GAAP financial statements included in our sample.

The airlines reported in fourteen cases that they received governmental tax relief or a deferment of taxes. The latter means that companies are allowed to pay current taxes at a later period as to improve the liquidity position. Nine of these financial statements are based on US GAAP standards and five financial statements are based on IFRS. Nine out of the fourteen airlines have disclosed the amount of this tax relief or deferment in their financial statements of which eight are based on US GAAP and one financial statement is based on IFRS. We cannot determine whether the financial statements have disclosed information of all material tax deferments or tax reliefs. We observe that the US GAAP financial statements only reported on one or certain elements of the tax reliefs of the CARES Act. It could be the case that certain elements are not material.

Ten financial statements did not disclose tax relief or deferment of taxes. All these ten airlines reported under IFRS. We observe that one of these airlines did not recognize or disclose taxes at all in their financial statements. Taxes depend on the local laws and regulations of the specific jurisdiction. We conclude that the tax disclosure on relief or deferment can be further improved from a qualitative and quantitative perspective.

In Table 5 the governmental loan consists of the loans between the airlines and the government including the governmental loan facilities to the extent drawn as per year end. We observe that fourteen airlines have drawn governmental loans or loans which are guaranteed fully or partially by the state for a total amount of EUR 19.301 million per year end. This means that there could be undrawn government loans (facilities) as per year end as well. All airlines which drew governmental or governmental guaranteed loans as per year-end included a disclosure related to terms and conditions of the loans. All US GAAP financial statements referred to the CARES Act or partially disclosed the most important elements and support conditions attached to these loans such as: payment of employees, restriction of furloughs over certain time periods, maintaining a certain level of commercial flights, prohibition of repurchase of shares over a certain time period, limitation of dividend over a certain time period, restrictions on remuneration of the board and the issuance of warrants in return for loans obtained from the US government. Aegan Airlines SA based in Greece, also disclosed the issuance of warrants for governmental loans in their financial statements.

We noted that no sustainability criteria were mentioned as a condition for obtaining the loans within the US GAAP financials statements. Air France-KLM mentioned as a condition for the Dutch governmental loan that the airline needs to become more sustainable. SAS AB describes that dividend payments need to be aligned with long-term sustainability goals and are depending on the conditions of the governmental support received for the COVID-19 pandemic.

Regarding four IFRS financial statements we observe that airlines which originate from international mergers received governmental loans from multiple countries. The terms and conditions are described in the financial statements per jurisdiction.

A remarkable observation stems from the financial statements of Aegan Airlines SA. The Chairman of the Board and the CEO decided and announced on 31 March 2020, that they will not receive any remuneration (both fixed and variable) for their services to the Company for 2020.

We have selected the financial statements of Spirit Airlines Inc.⁷ as best practice for disclosing the nature and impact of governmental assistance, refer to Figure 4. The central disclosure of all governmental measures under the header COVID-19 legislation makes it understandable for the reader what the impact of governmental support is on the financial statements, both in current and future periods. The user of the financial statements can read the airline received forms of support such as a reimbursement for employee costs, a 10-year interest loan (including the issuance of warrants to the US federal government), refundable tax credits for employment taxes, certain tax loss carrybacks, waiver for federal fuel taxes and deferred payment of employer portion of social security taxes. More important is that the airline disclosed the related amounts to these programs and the financial statement affected or made a reference to the relevant note. Also, the restrictions for these governmental support programs are summarized.

Both the IASB and the FASB issued a practical expedient or relief for COVID-19 related rent concessions. The practical expedient provides lessees with an exemption from assessing whether COVID-19 related rent concessions is a lease modification. According to IFRS 16:60 ‘An entity shall disclose the amount recognized in profit or loss for the reporting period to reflect changes in lease payments that arise from rent concessions to which the lessee has applied the practical expedient in paragraph 46A.’

This research verifies how many financial statements in our sample make use of this practical expedient and whether the financial statements quantify the effect of the practical expedient for IFRS financial statements. Under US GAAP the practical relief was part of a staff Q&A document which requires no specific obligatory disclosure for this practical relief in the financial statements. We observe that the practical expedient or relief is not mentioned at all in the financial statements of twenty airlines. We cannot determine whether the practical expedient or relief is not used, not material enough to disclose or that the company is deficient in making the disclosure. An explanation for the six companies in our sample that report on IFRS as endorsed by the EU, might be that the European Union endorsed the IFRS 16 practical expedient after the issuance of the half year interim financial statements. As a result, the expedient could not be used in the interim financial statements. And subsequently, the companies did not choose to apply for the expedient in reporting year 2020 covering this interim period. The EU-endorsement process apparently hampers application of these ‘quick fixes’ in the standards. The same may apply to other jurisdictions that have endorsement processes before amendments to IFRS might be used.

Four airlines quantified the effect of the practical expedient for rent concessions due to COVID-19 in their financial statements. The range lies between EUR 0.4 million and EUR 22.3 million. Three financial statements disclose the effect of the practical expedient on the profit and loss account for a total value of EUR 3.2 million as required by IFRS 16.60A.

The best practice for the disclosure on practical expedient for the lease concession can be found in the financial statements of China Eastern Airlines Inc, refer to Figure 5. The disclosure illustrates as per when China Eastern Airlines Inc.⁸ applies the practical expedient, what kind of leases it covers, quantifies the effect of the practical expedient in a monetary value and explains the accounting policy used.

As already mentioned, the SEC and ESMA requested clarity on impairments of assets especially during the COVID-19 pandemic given the severe impact on certain business sectors. In Table 6 we give an overview of impairment losses recognized in our research per category of asset.

Table 6 shows an amount of EUR 13.523 million in total for impairment losses recognized in all categories which averages approximately 2,5% of the value of total assets in our research sample. This percentage shows that the total effect of impairments is still modest given the fact that the remaining 97,5% of the assets is still deemed recoverable despite the pandemic impact. The impairment tests are predominantly done by performing a value in use method as described in IAS 36. In this method estimates of future cash inflows and outflows of the cash generating unit to which the assets belong are derived from continuing use of the asset during its expected useful life and from its ultimate disposal. In the airline industry tangible assets have typically a long-term remaining average useful life. Therefore, assumptions about the post-pandemic recovery of the passenger airline industry are pivotal in these value in use tests. An expected quick recovery to pre-pandemic figures will probably not lead to material impairment losses in a value in use model while a slow recovery path of (for example) five years to normal pre-pandemic levels will probably have a material effect on recoverable amounts.

We have examined whether and how companies disclosed ‘pandemic recovery scenarios’ in their notes where the value in use assumptions are explained (based on IAS 36/ASC 350/ASC 360).

We observe that nine out of the 24 financial statements disclose aspects of the impairment test in the notes of their financial statements. Only three out of these nine financial statements discussed the recovery scenarios for the value in use calculation explicitly in the note of the impairment test.

The best practice for the impairment disclosure can be found in the financial statements of Finnair Oyj, refer to Figure 6. The disclosure illustrates what the period is for the forecast, whether different scenarios have been considered and how much weight is allocated to each scenario for the value in use calculation. Key assumptions have been benchmarked against external sources and a sensitivity check has been performed and disclosed, for a full overview of the disclosure related to impairment testing refer to pages 67 and 68 of the financial statements of Finnair Oyj.