Brief of IND AS Areas to be considered (A questionnaire for management) Due to Covid-19 while preparing Financial Statement for FY 2019-20
Areas Covered:
1. Inventory Measurement
2. Impairment of Non-Financial Assets
3. Provisions, Contingent Liabilities and Contingent Assets
4. Going Concern Assessment
5. Property, Plant and Equipment
6. Presentation of Financial Statements
7. Borrowing Costs
8. Financial Instruments
- Impairment Losses
- Fair Value Measurement
- Hedge Accounting
9. Leases
10. Revenue
11. Modifications or Termination of Contracts or Arrangements
12. Income Taxes
IND AS 2 Inventories
It might be necessary to write down inventories to net realizable value due to reduced movement in inventory, decline in selling prices, or inventory obsolescence due to lower than expected sales.
1. Whether the management is considering written down of inventories to NRV item by item for:
- Finished Goods
- WIP
AND
In case of Raw Material @ Lower of Cost or Replacement Price if the finished goods are expected to be sold at a price lower than the cost.
Please Provide the above data on item by item basis and also the assumptions/estimates taken into consideration for calculation of NRV.
IND AS 36, IMPAIRMENT OF ASSETS
2. Since external indicator exists for Assets to be tested for Impairment loss, Whether the management is testing for impairment, assets covered under this IND AS (For Eg PPE, Goodwill or Cash generating units)?
For the purpose of this standard, for each asset/CGU, recoverable amount is calculated which is higher of:
Value in use
or
Fair Value less cost of disposal
Impairment loss = Carrying amount – Recoverable Amount
For the purpose of this standard please prepare data considering the below mentioned points:
- Contraction in economic activity due to covid 19 is considered to be an impairment indicator at the reporting date for impairment assessment;
- Assumptions used for impairment testing and determining recoverable amounts before the outbreak of covid 19 require 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 to be updated to reflect the impact of covid 19;
- Market assumptions used to determine fair value for recoverable amounts need reconsideration;
- Reasonable assumptions are taken in estimating the value-in-use and fair value less costs of disposal and ensuring that the impairment loss is estimated reliably.
- Considering facts and circumstances, entities to provide detailed disclosures on the assumptions and sensitivities considered for effects of the COVID-19.
Ind AS 37, Provisions, Contingent Liabilities and Contingent Assets
3. Whether the management is assessing, As a result of COVID -19, some contracts that may become onerous for reasons such as increase in cost of material/labour, etc. Ind AS 37 requires assets dedicated to a contract to be tested for impairment before a liability for an onerous contract is recognized.
Additionally, there could be losses from imposition of penalty due to delay in supply of goods, which may need to be considered under the guidance of Ind AS 115.
For this purpose, Management has to disclose that it has assessed whether executory contracts are onerous due to the adverse impact of COVID -19. If the management is unable to assess whether some of the executory contracts are onerous due to inadequacy of information, the same should be disclosed.
Ind AS 1, Presentation of Financial Statements & Ind AS 10, Events after the Reporting Period
Q1. Whether the Management of the entity has assessed the impact of COVID-19 and the measures taken on its ability to continue as a going concern and also the impact of COVID-19 after the reporting date to be considered on Going Concern?
Therefore, If, management after the reporting date either intends to liquidate or to cease trading, or has no realistic alternative but to do so, the financial statements should not be prepared on going concern basis. Necessary disclosures as per Ind AS 1 shall also be made, such as material uncertainties that might cast significant doubt upon an entity’s ability to continue as a going concern.
Q2. Whether there has been a Breach of loan covenants (including classification of liabilities into current and non-current) Due to COVID-19 which may trigger the liability becoming due for payment and liability becoming current?
Q3. Information regarding Sources of estimation uncertainty under Ind AS 1 since Ind AS 1, Presentation of Financial Statements, requires an entity to disclose information about the assumptions it makes about the future, and other major sources of estimation of uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. COVID-19 may have created many uncertainties about the likely future scenarios which may affect the estimations of amounts recognised in the balance sheet
Q4. Whether Management has considered making adequate disclosures and explanatory notes for comparative information for the preparation and presentation of financial statements under Ind AS
Framework requires that users must be able to compare the financial statements of an entity through time in order to identify trends in its financial position and performance and also compare it with financial statements of other entities
COVID-19 may have affected the financial performance and financial position of entities.
IND AS 16, PROPERTY PLANT AND EQUIPMENT
Since Ind AS 16 require that useful life and residual life of PPE needs revision on annual basis. COVID-19 impact may have affected the expected useful life and residual life of PPE Whether the management has reviewed the residual value and the useful life of an asset?
Ind AS 23, Borrowing Costs
Ind AS 23 require that the capitalisation of interest is suspended when development of an asset is suspended. Whether the management has considered this aspect while evaluating the impact of COVID-19.?
Ind AS 10, Events After the Reporting Period,
Entities must disclose significant recognition and measurement uncertainties created by the outbreak of the COVID -19 in measuring various assets and liabilities, Entities to disclose how they have dealt with the impact of COVID -19?
Ind AS 109, Financial Instruments
Financial Instruments – Impairment loss recognition and measurement is based on Expected Credit Loss (ECL) model
Whether the entity has assessed Credit losses for following financial assets:
- Amount receivable from customers
- Amount receivable from Advances etc.
For this purpose, we require ECL analysis for all financial assets on which ECL approach is applicable.
Ind AS 113, Fair Value Measurement
Whether the management has considered Critical Factors to be considered in Fair Value measurement Since fair value is determined in different ways i.e. it can be based on observable market price (quoted price in an active market – Level 1) or application of valuation techniques (Level 2 and Level 3) as of the reporting date.
For this we require basis of adequate management consideration and professional judgment to determine whether the quoted prices are based on transactions in an orderly market.
Ind AS 116, Leases
Q.1 Whether the transition effects as on 01st April 2019, of IND AS 116 has been properly accounted for and disclosure regarding the same has been made?
Q.2 Due to COVID-19, there can be changes in the terms of lease arrangements, such revised terms or concessions may lead to the application of accounting relating to the modification of leases, Whether the same has been duly considered?
Q.3 Discount rate used to determine the present value of new lease liabilities may need to incorporate any risk associated with COVID-19, whether the same has been considered?
Q.4 Entities will need to determine whether as a result of COVID -19, any lease arrangement has become onerous?
Ind AS 115, Revenue from Contracts with Customers
Whether the management has considered impact, Due to COVID-19, that there could be likely increase in cancellation of Units booked, higher price discounts etc. Under Ind AS 115, these factors need to be considered in estimating the amount of revenue to recognized. Ind AS 115 requires disclosure of information that allows users to understand the nature, amount, timing and uncertainty of cash flows arising from revenue. Entities has considered disclosure about the impact of COVID-19 on entities revenue.?
For this purpose, we require the number and value of units cancelled post the outbreak of covid 2019.
Ind AS 12, Income Taxes
The COVID-19 could affect future profits and/or may also reduce the amount of deferred tax liabilities and/or create additional deductible temporary differences due to various factors (e.g., asset impairment).
Whether the management has reassessed the forecasted profits and the recoverability of deferred tax assets in accordance with Ind AS 12 considering the additional uncertainty arising from the COVID-19 and the steps being taken by the management to control it.?
For this purpose, Management should disclose any significant judgements and estimates made in assessing the recoverability of deferred tax assets, in accordance with Ind AS 1.
Ind AS 34, Interim Financial Reporting
Since the Recognition and measurement guidance applicable to annual financial statements equally applies to interim financial statements. No recognition or measurement exceptions for interim reporting. Whether the management has considered the impact of the COVID-19 as discrete event for the purposes of calculating the expected effective tax rate.?
Additional disclosure should be given to reflect the financial impact of the COVID-19 and the measures taken to contain it.
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