The spread of COVID-19 has brought numbers, statistics and charts to the forefront of the daily lives of millions of people resulting in grave and unsettling consequences. The outbreak of COVID-19 and its fatality rate is increasing daily on a worldwide basis.
It has adversely affected the world at large which in turn has affected individuals, families, businesses, governments in such a deep negative way, that its impact assessment is yet to be known by everyone. COVID-19’s impact is on every part of society which may include either social, economic or geographical and every affected area would take its own time and cost to turn back to normal.
It also has implications for areas such as accounting and auditing, as well. Certainly, both functions are deeply affected, as the financial markets make clear almost daily with fluctuating valuations and unprecedented volatility.
At industrial level, the operations have been restricted, supply chains have been hindered, liquidity has been slow down, movement of people are restricted. These has resulted into separation of consumers from many companies affecting demand-supply chain and also gradually destroying consumer purchasing power.
Companies will be having tough times doing accounting in the backdrop of Coronavirus outbreak, varying on the basis of its nature and size of business entity. Various aspects like assessing impairments, recognising deferred tax assets, Inventories: Net realisation value, Fair value measurement, Revenue recognition, etc. would be a challenge during these times.
Due to Covid-19, it is evident that many businesses supply – demand chain affected and this area must be assessed thoroughly to determine the impairment. Events such as inventory obsolescence or cash generating units whose market value decline is an indicator of impairment. Provision on trade receivables due to sudden extension in tenure would be another question to deal with.
Deferred tax Assessment:
With uncertainty over the estimated profit for future years due to Covid-19 impact, deferred tax assets recognized for deductible temporary differences, unused tax losses and unused tax credits would be questionable.
Inventories: net realizable value
Companies with COVID-19-related revenue declines or disrupted supply chains should evaluate whether they need to adjust the carrying value of their inventory. Perishables, products with short shelf lives or expiration dates, or specific seasonal inventories are at the most risk of an impairment.
One of the biggest challenges faced by every business is the disturbance in the Cash Management System resulting in non-payment of instalment due to banks or financial institutions or other parties, audit of inventories (stocks) for working capital requirements, and payment of salaries which in turn affects the production cycle.
Cash flow issues would also affect the submission of statutory dues such as Provident Fund, Employee Provident Fund, and Goods and Services Tax. This may result in issue of an adverse opinion by auditors in their audit report.
Debt modifications and loan covenants
Companies experiencing reduced revenues, higher operating costs and/or cash flow challenges due to COVID–19 may need to obtain additional financing, restructure existing debt agreements, or obtain waivers in debt covenants. These changes may represent a debt modification, debt extinguishment or a troubled debt restructuring, and all three have different accounting and reporting implications. If covenants are breached, the debt may need to be reclassified from long-term to current on the balance sheet.
Fair Value Measurement:
The determination of fair value in situations where it’s called for is much more complicated when there is uncertainty and volatility in the markets. Nonetheless, current market prices cannot be ignored in valuation assessments.
Notified Accounting Standards, allows only to recognize revenue when it is probable that the consideration will be collected. This suggests that to consider not only the customer’s ability but also the intention to pay that amount of consideration when it is due.
In current scenario, in addition to obvious impact of reduced revenue due to the impact of COVID-19, Companies also need to identify customer’s ability with long term credit period, pose a big challenge for recognition of revenue. This certainly creates a question for auditor to accept recognized revenue.
Presentation of Financial Statement:
Due to Covid-19 any materially affected business may justify the low profitability with an additional presentation of line items. When items of income or expense are material, an entity shall disclose their nature and amount separately, with such separate disclosure businesses may explain the reason and facts.
It is undoubtedly a challenging time for companies to prepare the financial statements with above areas to deal with and for auditor to certify.