Impact of Corona Virus on Financial Reporting
ICAI is concerned about the impact of Coronavirus disease (known as COVID-2019 or COVID-19) on the health of people worldwide as well as on the state of economy and commerce of the world in general and on India specifically. COVID-19 was first reported to the World Health Organisation (WHO) in December 2019 and it has rapidly spread to many other countries. Very recently, WHO has declared it as global pandemic. COVID-19 has not only affected the health of people across the globe and it has also caused severe disturbances in the global economic environment which has consequential impact on financial statements and reporting.
1. Inventory Measurement
2. Impairment of Non-Financial Assets
3. Financial Instruments
• Impairment Losses
• Fair Value Measurement
• Hedge Accounting
6. Provisions, Contingent Liabilities and Contingent Assets
7. Modiﬁcations or termination of Contracts or Arrangements
8. Going Concern Assessment
9. Income Taxes
10. Consolidated Financial Statements
11. Property, Plant and Equipment
12. Presentation of Financial Statements
13. Borrowing Costs
14. Post Balance Events
15. Interim Financial Reporting
Coronavirus (COVID-19) Impact on Financial Reporting - Accounting Year Ending March 31, 2020
ICAI is concerned about the impact of Coronavirus disease (known as COVID-2019 or COVID-19) on the health of people worldwide as well as on the state of economy and commerce of the world in general and on India speciﬁcally. ICAI is guided by the assessments given by the Government and public health authorities, domestic and international.
Latest media reports indicate the possible severe impact of this pandemic that the World Health Organisation (WHO), has been closely monitoring and considering its global impact. On March 11, 2020, WHO has assessed its risk and characterized it as global pandemic in view of the alarming levels of spread and severity, and of the alarming levels of infection.
The adverse impact of this global pandemic can vary from nation to nation, industry to industry and above all entity to entity. The effect depends upon the nature and extent of business connectivity of the individual entities with the nations more seriously affected by this pandemic. Apart from the health and safety of mankind, COVID-19 has unfavourably affected the economic environment which in turn has consequential impact on the results in the ﬁnancial statements and reporting.
While we are empathetic to the global concerns of health and safety of people, there is also a need to advise the preparers of ﬁnancial statements to ensure that the potential impact of COVID-19 is suitably considered in preparing and reporting their ﬁnancial statements for the year ended March 31, 2020. Speciﬁc requirements of a few accounting standards that may need special attention are indicated in this Accounting Advisory. It may be noted that we are only drawing the attention of preparers to some of the important requirements of Indian Accounting Standards (Ind AS) and Accounting Standards (AS), and this is not meant to be exhaustive and may differ based on speciﬁc facts, circumstances and business of respective preparers.
Note: The advisory has been prepared for:
1. Entities to whom Ind AS is applicable and
2. Entities to whom AS is applicable, viz,
a. Companies to whom Companies, Accounting Standards Rules, 2006 is applicable and
b. Non-corporate entities to whom AS issued by ICAI is applicable.
1. Inventory Measurement (Ind AS 2 and AS 2)
(a) In accordance with Ind AS 2, Inventories, and AS 2, Valuation of Inventories, it might be necessary to write down inventories to net realisable value due to reduced movement in inventory, decline in selling prices, or inventory obsolescence due to lower than expected sales.
Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Net realisable value refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. The management may consider written down of inventories to net realisable value item by item.
Ind AS 2 and AS 2 also provide that the allocation of ﬁxed production overheads to the costs of conversion is based on the normal production capacity. The amount of ﬁxed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred.
Entities should assess the signiﬁcance of any write-downs and whether they require disclosure in accordance with Ind AS 2/AS 2 as well as paragraph 98 (a) of Ind AS 1, Presentation of Financial Statements, and paragraph 14(a) of AS 5, Net Proﬁt or Loss for the Period, Prior Period Items and Changes in Accounting Policies. It is unlikely that the normal production capacity is to be reviewed for allocating ﬁxed production overheads for the year 2019-2020, because of adverse impact on the utilisation of the production capacity due to the impact of coronavirus on the overall economy or the segment (s) in which the entity is operating.
2. Impairment of Non-Financial Assets (Ind AS 36 and AS 28)
(a) Ind AS 36, Impairment of Assets, and AS 28, Impairment of Assets, require an entity to assess, at the end of each reporting period, whether there is any indication that non-ﬁnancial assets may be impaired. The impairment test only has to be carried out if there are such indications. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
Ind AS 36 relies on an 'economic' criterion for the recognition of an impairment loss. An 'economic' criterion is the best criterion to give information which is useful to users in assessing future cash ﬂows to be generated as a whole. In estimating the time value of money and the risks speciﬁc to an asset in determining whether the asset is impaired, factors, such as the probability or permanence of the impairment loss, are subsumed in the measurement.
Due to COVID 19, there might be temporary ceasing of operations or an immediate decline in demand or prices resulting in lowering of revenues and proﬁtability and reduced economic activity. These are the factors that the management may consider as the indicators that may require impairment testing for the purpose of Ind AS 36 and AS 28.
(b) For indeﬁnite useful life intangible asset or an intangible asset not yet available for use and goodwill, Ind AS 36 requires an annual impairment testing. There could be an indicator that impairment testing of goodwill and indeﬁnite useful life intangible assets are tested as of reporting date even if the entity follows other annual testing
cycle as per Ind AS 36.
(c) An entity needs to estimate the recoverable amount of the asset for impairment testing. Recoverable amount is the higher of the fair value less costs of disposal and the value in use. In cases where the recoverable amount is estimated based on value in use, the considerations on accounting estimates apply.
Critical Factors to Consider
The management needs to consider whether:
• Contraction in economic activity due to the outbreak of COVID 19 is considered to be an impairment indicator at the reporting date, which results in an impairment assessment;
• Assumptions used for impairment testing and to determine the recoverable amounts before the outbreak of COVID 19 requires any change;
• The assumptions used to determine discount rate to measure the recoverable amount require any adjustments;
• The forecasts or budgets for future cash ﬂows prepared by management should be updated to reﬂect the impact of COVID 19;
• Market assumptions used to determine fair value for recoverable amounts needs reconsideration;
• Reasonable assumptions are taken in estimating the value-in-use and fair value less costs of disposal and ensure that the impairment loss, if any, is estimated reliably.
The standard requires that goodwill being tested for impairment at a level that reﬂects the way an entity manages its operations and with which the goodwill would naturally be associated. Due to COVID-19, there might be signiﬁcant changes with an adverse effect in operations of a cash generating unit to which goodwill is allocated and therefore requiring additional focus and attention while testing of impairment of goodwill as at March 31, 2020.
The disclosure requirements in Ind AS 36 and AS 28 are extensive. Depending on speciﬁc facts and circumstances, entities need to consider providing detailed disclosures on the assumptions and sensitivities considered for effects of the COVID-19.
3. Financial Instruments
Entities to whom Ind AS is applicable Ind AS 109, Financial Instruments
Financial Instruments within the scope of Ind AS 109 such as Loans, Trade Receivables, Other Receivables, Investment in Debt instruments, Financial Guarantees and Loan Commitments not measured at fair value through proﬁt or loss, Contract Assets and Lease Receivables are subject to impairment loss recognition and measurement based on an approach called Expected Credit Loss (ECL). This approach was introduced in the aftermath of the global ﬁnancial crisis of 2008 to strengthen the accounting recognition of loan-loss provisions by incorporating a broader range of credit information. ECL approach is expected to consider forward-looking information and it is measured based on probability-weighted amount that is determined by evaluating a range of possible outcomes.
The widespread contraction in economic activity across the globe due to the rapid spread of COVID-19 is likely to have an impact on the quantiﬁcation of ECL and classiﬁcation of ﬁnancial assets into 3 buckets for recognition and measurement of impairment losses. In this context, the following are important factors to be considered by the preparers.
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