As of March 2020, the world is dealing with the presence of the global spreading of COVID-19 or popularly known as the Coronavirus. At the beginning of March 2020, the World Health Organization, after analyzing the dire spreading of the virus on a global scale, declared Coronavirus as a “global pandemic”. This global bio-crisis came with the frightful consequences that affected the social, political, and economic foundation of the world.
Overview:
In brief, the term ‘pandemic’ means the spreading of the virus has reached every nation of the world. The current situation has its roots in the year 2019 which impacted each and every sector of the economy. It has not only affected the mass population on a global scale but has also shown rapid retaliation against the global financial system.
The Indian Institute of Chartered Accountants of India, in the light of the prevailing pandemic and its implications on the Indian economic system, issued a report which is guided by the appraisals given by the Government and the general wellbeing authorities, domestic and international.
The aftermath of this pandemic may vary from nation to nation, industry to industry and the top of it, enterprise to enterprise. It becomes extremely difficult to state how and in what capacity every industry of the economic backdrop will be impacted. Looking at the spread of COVID-19, there is a temporary suspension of business operations which will ultimately result in a decline in demand and supply. As a result, the revenue numbers will drop down and the economic activity of the nation will come to a halt.
On March 25th, the Prime Minister declared a total lockdown of 21 days to curb the spreading of the Coronavirus. During this time, the small-scale, mid and large entities, and global companies would not be able to conduct their market operations.
COVID-19 AND ITS ADVERSE FINANCIAL IMPLICATIONS:-
While the global impact of the COVID-19 still prevails, there are certain touchpoints being issued by the ICAI. This is done in accordance to direct the formulators of the financial statements and reporting the same for the year ending March 31, 2020.
These are the statutory guidelines and are issued to ease the current financial enigma of a developing economy like India. It caters to the specific sections of the Accounting Standards which need immediate attention. All the required amendments to deal with the situation are mentioned in this Accounting Advisory which is circulated by the ICAI.
It keeps in mind the various entities that follow the IND AS and also the entities that fall under the following sections:
– Companies to whom Companies, Accounting Standards 2006 Rules is applicable;
– Non-corporate entities to whom AS issued by the ICAI are applicable.
Impact of COVID-19 on Financial Reporting:-
1) Inventory Measurement:
As per the AS 2, IND AS 2, Inventory and its valuation, it is imperative to write down the inventories to the net realizable value. This has been done in light of the reduced selling prices of goods, mobility of inventory, and stock obsolescence in the market.
2) Disablement of Non-financial assets:
In accordance with the AS 36 and AS 28, and the impairment of the non-financial assets, the entities have the right to assess if there is any indication of non-financial assets that may be impaired, in the current reporting year. If such a condition exists, then the entity can get the estimated recoverable amount of the asset.
As there might be a temporary suspension of operations accompanied by a decline in the overall demand, the management may use these as indicators for the impairment testing for AS 36 and AS 28.
3) Impairment Losses and Financial Instruments:
The financial instruments within the scope of AS 109 are not measured at the appropriate value of profit and loss. In addition, the Contract and Lease Receivables follow the impaired loss recognition and the measurement based on an approach called Expected Credit Loss. This approach was introduced in the year 2008 to fight the global recession and to overcome the credit-loss provisions by using a broader aspect of the credit information.
4) Leases:
The enterprises to whom AS 19 and AS 29 are applicable, there might be lease agreements between two parties. In order to combat COVID-19, the lessee may be granted a financial concession by the lessor amid the crisis. However, such information should be accounted for in the books of accounts for leases.
The lease payments may significantly be impacted, especially those that make use of underlying assets due to fewer business operations.
5) Revenue:
Because of COVID-19, there might be a significant increase in sales returns, volume discount decreases, and other prevailing discounts, etc
According to IND AS 115, these factors should be taken into consideration for evaluating the amount of revenue to be recognized. It also lays down the guidelines for the nature, amount, and unlikeliness of the cash flows resulting from the revenue-generating activities.
Certain entities may have postponed the revenue recognition completely due to a rise in the COVID-19 scenarios tremendously.
6) Provisions, Contingent Liabilities, and Contingent Assets:
Due to the impact of COVID-19, some contracts in the process may become onerous because of reasons such as the cost of material/labor, etc. In this case, management needs to realize which of its contracts have become onerous and the same needs to be disclosed.
As per IND AS 37, it also directs to test the assets for impairment before any liability for the onerous contract is recognized on them.
Along with the onerous contracts, there are certain changes in the treatment of restructuring costs and insurance claims to deal with situations like COVID-19.
7) Modifications or Termination of Contracts or Arrangements:
It directly follows that companies may modify or terminate contracts that lie under Ind AS and the ASs or guidelines mentioned in it. While following those guidelines, entities are specifically advised to consider the specific requirements of those standards.
8) Going Concern Assessment:
It is applicable to entities that follow IND AS 1 and AS 10. Going concern concept implies that the firm will continue to function in the foreseeable future. Generally, the financial statements are prepared for a period of 12 months. In this, it should be assessed whether it is appropriate or not due to the consequences of COVID-19.
Due to the impacts of COVID-19, the management should also realize if the firm continues to operate as a going concern after the reporting date or not. It is mandatory for the management to evaluate if the fundamental practices of accounting can be followed.
9) Income Taxes:
– COVID-19 could decrease the number of deferred tax liabilities and might affect future profits. The firms with deferred tax assets should revalue the predicted profits and the recoverability of deferred tax assets in consideration with Ind AS 12.
– The board should also reconsider its plans to distribute the profits among its subsidiaries.
10) Consolidated Financial Statements:
Ind AS 110 and AS 21 states that the financial statements of the parent and the subsidiary companies used in the preparation of the consolidated financial statements are to be drawn on the same accounting date.
However, the difference between the reporting dates should not be more than six months.
11) Property Plant and Equipment (PPE):
As per Ind AS 16 and AS 10, the useful life and the residual life of PPE needs to be revised on a yearly basis. Because of COVID-19, the PPE may remain under-utilized for an unknown period of time.
In such cases, the management should value the useful and the residual life of the assets and account for the changes if expectations differ from the previous estimates.
12) Presentation of Financial Statements:
The presentations of financial statements require the entities to disclose information about the unforeseeable events of the future and the predictions it derives from the uncertainties at the end of the financial period.
Ind AS 21 demands the comparative information of financial statements for the preparation and its presentation. This technique requires the users to evaluate their financial statements from time to time in order to find the modifications and compare the same with the other firms. As COVID-19 surely would have affected the financial position, the makers of the financial statements are required to present disclosers and adequate explanatory notes.
13) Borrowing Costs:
All the above mentioned requires the suspension of capitalization interests when the development of an asset comes to a halt. The same applies here while dealing with COVID-19.
14) Post Balance Events:
As per Ind AS 10, the management is required to term the events into two categories i.e Adjusting Events and Non-Adjusting Events.
According to this, the entities must disclose the information regarding the measurement and recognition of uncertainties that occurred due to COVID-19. They should also mention the information on how they tackled the problems that arose due to COVID-19.
15) Interim Financial Reporting:
The application of recognition and measurement equally validates in this standard too. As per Ind AS 34, there should be greater usage of estimates in the interim financial statements but the information needs to be verified, thus reliable.
Ind AS 34 and AS 25 requires to report events and transactions that are significant to assess the financial position and performance of the firm since the last reporting period.
This clearly indicates that additional information should be given to tackling the adversaries of the COVID-19 and the ways to contain the same.
These are the primary alterations recommended by the Accounting Advisory made by the ICAI to face the future implications of the COVID-19 outbreak in the nation. It should be noted that every entity will have a different outcome while dealing with the prevailing scenario.
Therefore, it is mandatory to exercise the above while keeping the fundamental basics of accounting practices intact.
Samaksh Rastogi
Partner
PBS Pvt Ltd
Disclaimer:
The information contained herein is of a general nature and is not intended to address the circumstances of any person or entity. Although we endeavor to provide accurate and timely information, there is no guarantee that such information is accurate as of the date it received or that it will continue to be accurate in the future. No one should act on such information appropriate professional advice after a thorough examination of the situation.
