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Corona and Ind AS

CA Sumit Sarda 
on 29 June 2020

LinkedIn


Coronavirus has led to many issues world around not just in relation to health but also has impact over various other concerns and one such concern is its accounting impact. Since lots of businesses have been hurt economically, a lot of matters will now be of concern to be informed to the stakeholders, as a lot will be concerned about the financial stability of the orgaizations

Governments world around have taken steps to stop its spread which have indirectly affected the financial health of many organizations.

Let's try to understand the Ind AS impact of the same, maybe not all be covered but will try to cover as many as we could

Ind AS 10: Events occurring after the balance sheet date and going concern impact

As we know India was almost in complete lockdown for more than two months and thereafter unlocking has taken place but in very limited way. Fixed costs continued, labour migrated to their home, sales turned to be zero, all this had a lot of impact on the organization since a lot remained closed or maybe idle. The question arose whether they continue to exist for next 12 months.

As per Ind AS 1, the management evaluates the going concern assumption before preparing the financial statements. And such assessment is made post end of financial year during audit period prior to issue of balance sheet to stakeholders.

So one needs to assess while preparation of such financial statements, which we are preparing in this pandemic situation whether the entity is financially strong, assets are worth minimum the carrying amount, can business survive for next 12 months, alternative ways to finance and so on

Corona and Ind AS
  1. If one assesses that going concern assumption is correct or management believes that an entity will survive the pandemic, mere disclosure in the notes to accounts of financial statements being prepared on basis of going concern assumption in uncertainties surrounding the assessment is more than sufficient.
  2. However if one assesses that going concern assumption is not correct, then, the financial statements are prepared ignoring the fundamental accounting assumptions like accrual and statements are prepared based on realizable value

Ind AS 109: Financial Instruments and expected credit loss of financial assets

Maybe our business is not impacted but our clients business have been and maybe to such extent that they will not be able to repay their dues at all or maybe not in time. This leads to expected credit loss of the financial assets due to fall in credit rating which can be much higher than estimations based on historical information.

As per Ind AS 109 para 5.5.17

'An entity shall measure expected credit losses of a financial instrument in a way that reflects:

(a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;

(b) the time value of money; and

(c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions

So if an entity has trade receivables or loans whose businesses and cash flows are strongly affected by the virus and the related measures, one should determine the Expected Credit Losses because of the same in subsequent periods.

E.g.

A Lts. has a debtor of Rs.5 lakhs. Due to the coronavirus pandemic situation, State government ordered to shut down the shops and the he loses the revenues but has not turned bankrupt. However he will not be able to repay the debt on time as per the contract. Now there are three possibilities

  1. Post reporting date, in audit period the shops have reopened but overall sales are reducred by let's say 15%. It does not impact debtor's ability to pay on time but considering the probabilistic calculations chances this situation is let's say 20%.
  2. Post reporting date, in audit period, shops took time to reopen because of labour issues and other factors, let's say 4 months and debtors asks you for a discount of 25% in debt payment. The probability of this scenario is 65%.
  3. Post reporting date, in audit period shops could not reopen and will take longer time. We feel the debtor will go bankrupt and expected recoverability is let's say 20%. The probability of this scenario is 15%.

If one situation is known, we may book credit loss as per the scenario considering most possible outcome, however if we are not sure and if we consider the probability calculations

Let's put this nicely in the table:

Scenario

Loss given Default

Probability

Expected credit loss

1

0%

20%

0

2

25%

65%

16.25%

3

80%

15%

12%

Total

28.25%

 

Thus we book a provision for doubtful debts of 28.25%

 

Ind AS 36: Impairment of assets

As per para 12(b) of Ind AS 36

'In assessing whether there is any indication that an asset may be impaired,an entity shall consider, as a minimum, the following indications:

External sources of information

(b) significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.'

Corona can be one such adverse economic impact and hence entity should test its assets for the impairment specifically tourism, restaurants, entertainment and similar industries, because the estimated future cash flows generated by the asset are much lower.

Provisions under Ind AS 37

Many organizations may plan for restructuring, or provisions maybe required for onerous contracts

Measurement of inventories under Ind AS 2 -

Lots of products during lockdown may have expired, or maybe now customers spending capacity may have reduced and hence will not be ready to pay the earlier market price

Lease contracts under Ind AS 116

Lease payment schedules may have changed or in some cases even reduced or cancelled or lease amount have been reduced resulting in lease modification

Regarding Ind AS 116 I will write a separate article to explain the impact of lease modification. I hope I was able to through some light on the issue, but remember this is something that is faced by almost all organizations in one way or the other, so it is not a panic situation but a point of realignment.

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