COVID-19 pandemic has disrupted the entire world whether its humans’ health or their financial health. Financial statements have to bear the direct impact of this unprecedented pandemic. But how will this be shown and disclosed? This is being answered by the prestigious Institute of Chartered Accountants of India (ICAI) in its Advisory issued in March 2020 “Impact of Coronavirus on Financial Reporting and Auditors Consideration”. The following is the summary of important points highlighted in this advisory w.r.t Financial statements.
|S.No.||Accounting Standard||Points should be considered|
|1.||AS-1||Disclosure of Accounting Principles
Disclosures regarding impact of COVID-19 on financial position; financial performance; and cash flows of the entity must be disclosed by way of explanatory notes as these help in better understanding to the users. Moreover, it also helps in better comparison with last year financials.
Going Concern Assessment
Financial Statements are prepared on the basis of an important assumption i.e. Going Concern. An entity must consider events occurring after reporting date, for example, whether entity intends to liquidate or to cease trading or no realistic alternative exist to continue the business, in order to ascertain its ability to continue as Going Concern and accordingly prepare its financial statements.
|2.||AS-2||Valuation of Inventories
Due to COVID-19, Net Realizable Value of closing inventory may have been reduced due to
– Decline in Selling price,
– Obsolescence of inventory,
– Non-movement or slow movement of inventory.
– Lower expected sales
|3.||AS- 4||Contingencies and Events Occurring After the Balance Sheet Date
a.) In Case of loans, Trade Receivables, etc. as at end of reporting date, the entities need to consider events occurring after reporting date. For example:-
– the risk of default by debtor due to its reduced economic activities
– any concession, loan repayment holidays, reduction in interest rates ,which lender would have not considered otherwise, may appear as an evidence of financial crunch with the debtor
– Reduction in value of Collaterals
b.) Impact of Adjusting events may require adjustments to assets and liabilities.
c.) Impact of Material Non-Adjusting events may require appropriate disclosures.
|4.||AS – 9||Revenue Recognition
COVID-19 has created uncertainty in businesses. As per AS-9, where the Collectability of Revenue is uncertain, the revenue recognition should be postponed along with proper disclosures.
Where uncertainty relating to collectability arises post recognition of Revenue, then a separate provision should be made to reflect the fact.
|5.||AS -10||Property, Plant and Equipment
A number of fixed assets remain idle due to lockdown announced to contain COVID-19. However, as per AS-10 Depreciation still needs to be charged even though they remained idle.
Due to the impact on operations and economic activities, Residual value and useful life of asset may be getting affected. The entity needs to reassess them and make changes considering it as Change in Accounting Estimates.
|6.||AS – 13||Accounting for Investments
Financial markets have been highly impacted by COVID-19.
– Decrease in level of volume or level of activity
– Decline in market prices of Scrips and derivatives
Non-Current Investments:- In such a scenario, entities may need to assess creation of Provision for Decline in Value of Investments.
Current Investments:- Entities must consider impact of COVID while determining Fair Value of Current Investments.
|7.||AS -15||Employee Benefits
Any changes in agreed terms & Conditions should be carefully examined.
|8.||AS -16||Borrowing Costs
This pandemic and resultant lockdown had brought suspension on a number of contracts. Entities must consider the requirement to suspend Interest capitalization on suspended contracts.
a.) Revision of terms or concessions granted in lease arrangements should be accounted for as per AS-19. Any anticipated revision should not be taken into account.
b.) Discount rates used to determine Present Value of minimum lease payments of NEW LEASES may need to be reassessed.
|10.||AS – 22||Accounting for Taxes on Income
Entities having Deferred Tax Assets (DTA) should reassess virtual certainty of future taxable profits to ensure that DTA recognized will be recovered.
|11.||AS -28||Impairment of Assets
a.) As per AS-28, if indicators exist at the end of reporting period then asset is tested for impairment. In the era of COVID, following indicators may trigger testing assets for impairment:-
– Ceasing of operations temporarily
– Decline in demand or prices
– Lower revenues
– Lower profitability
b.) Entities should assess the impact of COVID-19 while determining
– Future budgeted cash flows used in determining value in use
– Discount rates to get Present value of future cash flows for value in use
– Net Selling price
c.) Goodwill is tested for impairment annually. If there is significant impact on operations of Cash Generating Unit to which goodwill relates, then this may result in impairment of such goodwill.
|12.||AS -29||Provisions, Contingent Liabilities and Contingent Assets
a.) Provisions may be required to be created for
– Contracts which become onerous
– Penalty due to non-execution of contracts
b.) Insurance Claims – Any insurance claim on account of disruption of business due to COVID-19 should be recognized in books only when its recovery from insurance company is virtually certain, for example, claim is admitted by the insurance company or insurance company will accept its obligations.