COVID-19 (Novel Coronavirus) is having a worldwide impact which in turn has affected each and everyone in such a deep negative way, that its impact assessment is yet to be known by everyone. The COVID-19 outbreak has already had a significant effect on the economies of affected countries and international financial markets. As the companies in India has their year-end in March itself, there is an urgent need to evaluate the impacts of the outbreak on their accounting and financial reporting. Covid-19 outbreak has implications for areas such as accounting and auditing, as well. Certainly, both functions are deeply affected and we will discuss and address the impact on both.
To understand in more lucid way lets understand it as per accounting standard wise:
AS-1: Disclosure of accounting policies:
As per AS-1, one of the fundamental accounting assumptions of financial statement is concept of going concern. It Due to this pandemic, the Management needs to evaluate whether it is appropriate to use this fundamental accounting assumptions while preparation of financial statements. In order to do so, it is necessary to assess the impact of COVID-19, and also state the measures taken if any to safeguard or to reduce the same. Thus, events happened after the balance sheet date needs to be assessed while evaluating the same.
AS-2: Accounting for Inventories
As per Para 5 “Measurement of inventories” – “Inventories should be valued at the lower of cost and net realisable value.”
Due to COVID 19 net realisable value may be reduced to below of costs due to forced sale, inventory obsolescence, decline in selling price etc. Since the pandemic seems of no end, lockdown has not been eased out, the inventory may be stocked, pilled up and thus the auditor and/or Management needs to take into account these factors into account while doing the valuation of same.
Management should also assess the adverse impact on allocation of fixed overhead. Unallocated overheads should be recognised as an expense and separate disclosure should be provided in the books indicating the impact on the overall economy due to COVID19
AS 4: Contingencies and Events Occurring After the Balance Sheet Date:
The outbreak of COVID-19 has caused significant deterioration in economic conditions for some companies and may impact their going concern ability. Since, the extension of lockdown happened after balance sheet date, many of our receivables (which includes trade receivables, Loans & advances etc) can be doubtful for realization or even bad debt also. Management should need to assess the impact of the current events and conditions and make appropriate adjustments in books of accounts if required. Proper disclosure is also required on how they have dealt with the impact of pandemic
This will have major impact on Banks and Insurance entities financial statements regarding classification of Loans and advances.
AS-5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies
The Management need to consider whether there is need to change in accounting estimates and policies to assess the correct financial position of the entity. For example, there may be need to assess the useful life of PPE, Residual value of PPE.
AS-9: Revenue Recognition:
The critical factor for recognizing revenue is the certainty in collection of revenue. Due to COVID-19, management should assess if there is need to postpone recognition of revenue due to significant uncertainty of realization. It is required to be disclosed by way of separate disclosure the circumstances due to which the same has been postponed. There could be increase in sales return, discount post sales, onerous contract revenue etc. Hence, proper adjustments need to be done for revenue recognition.
AS-12: Government Grant:
Due to economic slowdown government may come up with various grant packages and assistance. Hence, it is required to assess the conditions and definition attached to it. Companies should consider explaining its treatment by way of separate disclosure and its impact on financial statement
AS-13: Accounting for investments:
Since AS-13, requires current investments to be recorded at lower of Costs and NRV. Hence, Management needs to evaluate the impact of NRV/Fair value on its investments. Moreover, if there is permanent diminishing of value then Long-term investments needs to be restated. Not only the stock market but other markets, too, are affected due to coronavirus as it poses challenges for assessing fair value. What was reasonable and acceptable value till December 2019 is suddenly not acceptable in March 2020.
What businesses should do? Should this call for impairment? Or one may treat this as not the permanent situation and explain the rationale. Such a scenario would be many and discussion between companies and auditors would be core to resolve such position. Especially start-ups and private companies would have significant challenges.
Further, entities on which hedge accounting and derivative accounting is applicable, fair valuation measurement requires professional judgement to determine the same.
AS-15: Employee Benefits
Market volatility and change in remuneration policies may impact the measurement of employee benefit and recognition of share-based payment expenses. It should be reassessed whether they are beneficial or non-beneficial to the employees and accounted for accordingly.
AS-16: Borrowing costs
As the RBI has announced moratorium on loans for three months, (which may extend further) proper treatment of interest pertaining to this period must be looked into. Further, care should be taken if the entity has opted for restricting or change of payment terms, suspension of capitalisation etc
Due to COVID-19, there may be amendment in terms of lease agreement on various variable factors. Such changes should be factored in while accounting for lease. It should be noted here, changes in terms should be in actual terms and not merely anticipated. Further, variable lease payment (especially revenue linked) will be much impacted. Lessors would need to ascertain whether some of their underlying assets are to be considered for impairment due to change in demand, decline in rentals, credit ratings, reassessment of term etc.
AS-22: Accounting for taxes on Income
A deferred tax asset is recognized for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized.
With uncertainty over the estimated profit for future years due to Covid-19, deferred tax assets recognized would be questionable.
Residual impact on Fair value assessment:
As we have already discussed above, fair value measurement will have a significant impact in the assumptions used to measure Fair value of the assets/liabilities which may be due to change in valuation technique, observable inputs, earlier evidences etc. Hence, proper disclosure is very much essential to the users of financial statements.
Thus, we can say that the rapid outbreak of the coronavirus (COVID-19) presents an alarming health crisis that the world is coping with. it is undoubtedly a challenging time for companies to prepare the financial with above areas to deal with and for auditor to certify.