The adverse effects of the outbreak of COVID-19 cannot be overlooked. No sector has been left untouched and unaffected by this pandemic. Due to the challenging times the ICAI(Institute of Chartered Accountants of India) has issued an accounting advisory for its members. ICAI has been monitoring actions taken by Accounting Regulatory Bodies and Prudential Regulators of Banking Sector and Capital Market Authorities across the key economies of the globe.
One important aspect for all Chartered Accountants is to bear in mind that in these challenging turbulent times is to maintain the high quality of accounting principles, transparency, and timeliness of giving appropriate information to users of financial statements.
Accounting advisory guides on the key areas that need to be considered during these challenging times:
(1) Inventory Measurement - Application of Cost or Net Realisable Value in the current depressed economic conditions
(2) Impairment of Non-Financial Assets such as PPE, Goodwill and Intangibles - Significant management judgment is need in computation of future cash flows, forecasting different economic scenarios
(3) Financial Instruments (Impairment Losses, Fair Value Measurement and Hedge Accounting) - In this challenging times application of principle-based standard Ind AS 109 requires management judgement. One of the primary benefits of this feature is the standard provides sufficient flexibility to entities to faithfully reflect the individual facts and circumstances of entities as to how the COVID-19 has impacted them. The guidance draws their attention key aspects of classification of credit exposures into 3 buckets based on a criteria called Significant Increase in Credit Risk (SICR). Entities need to factor in the economic relief such as loan repayment moratoriums in assessing this aspect.Entities attention is drawn to an important requirement that this stage 3 bucket criteria is not required for financial instruments such as Trade receivables and Contract Assets which form large part of credit risk exposure of manufacturing entities covered by Ind AS. We will be issuing further guidance on cautioning entities to avoid mechanistical application of COVID-19 situation in forecasting future economic conditions and important facts to note i.e. assessment of SICR is based on reasonable and supportable information available to the entity without undue cost and effort and this assessment is for the entire expected life of financial instrument and not over short term horizon.
(4) Leases - Highlights need to consider application of lease modification for concession granted by lessor to lessee and possible modifications to lease terms, assessment of variable lease payments based on revenue etc.,
(5) Revenue - Consideration of possible increase in sales returns, price concessions etc. in measurement of revenue i.e. variable consideration.
(6) Provisions, Contingent Liabilities and Contingent Assets - Potential for contracting turning out be onerous and requiring provisions. Insurance claims for business disruption etc cannot be mechanically treated as assets unless there is virtual certainty.
(7) Modifications or Termination of Contracts or Arrangements- Various Ind ASs/ASs have specific provisions on how to account for modifications to existing contracts and arrangements. Ind AS 109, Ind AS 32, Ind AS 102, Ind AS 19 and so on.
(8) Going Concern Assessment - Severe contraction in economic activities may have adverse consequences on entities ability to continue in the foreseeable future. Of course, entities need to consider the government economic relief packages and lenders concession etc. in making this assessment.
(9) Income Taxes - Future profitability of entities in some sectors may be adversely affected requiring attention to revisit the previous assumptions and thereby impacting computation of deferred tax assets.
(10) Consolidated Financial Statements-In some cases, entities may find it difficult to obtain financial statements of their subsidiaries e.g. in overseas locations, as of the parent’s reporting date. In this case, entities can utilise the relief of difference of upto 3 months and 6 months, in Ind AS 110 and AS 21, respectively.
(11) Property, Plant and Equipment - Two important aspects to bear in mind are depreciation charge even during the time when Plant and Machinery is idle or shut down. Further, there is a need to reassess the useful life and residual value of PPE.
(12) Presentation of Financial Statements- Breach of loan covenants may occur resulting in the loan becoming repayment on demand and current liability. But, Ind AS 1 has a relief i.e. if the lender agreed not demand repayment before the F/S are authorised for issue. COVID-19 circumstances may have caused difficulties in making reliable estimate for recognising and measuring certain items. Standard provides adequate discretion to entities to make suitable disclosures about various sources of uncertainty.
(13) Borrowing Costs-Entities capitalising borrowing costs may have to suspend capilalisation of borrowing costs if the development of assets is suspended temporarily due to COVID-19 outbreak.
(14) Post Balance Sheet Events - Very important to bear in mind the Ind AS 10 requirements of classification of economic events occurring subsequent to reporting date as adjusting and non-adjusting.
(15) Interim Financial Reporting- currently this standard may be of relevance to a very few entities who are following year end other than March 31st.