It doesn’t take more than a brief scan of the news to see the devastating impact of coronavirus (COVID-19). The fallout that the virus can and will take on human life is paramount. But beyond the toll this has taken on public health and safety, businesses around the world are also wrestling with how susceptible they have become to any potential volatility. The businesses which are dependent on supply from china or have exposure to the Chinese market are the worst affected.
We are trying to address the difficulties that will be faced by entities while preparing their financial statements for the year
The key challenges are:
- to capture the potential impact and implications on assets, liabilities and results.
- to provide appropriate disclosures to the stakeholders in an evolving business scenario in notes to accounts and management discussion and analysis statement for listed companies.
We are going to discuss this in detail below:
IAS 10 – Events after the reporting period (Ind AS 10 Events after the Reporting Period / AS 4 Contingencies & Events occurring after the Balance Sheet Date)
Events occurring after the reporting period /balance sheet date (31st Dec 2019) are those significant events , both favorable and unfavorable , that occur between the balance sheet date and the date when the financial statements are authorized for issue (Board of directors in case of a company or corresponding approving authority in case of other entity). IAS 10 Events after the reporting period makes a distinction between adjusting and non-adjusting events after the reporting period. The adjusting events are those which provide further evidence of conditions that existed at the balance sheet date and Non adjusting events are those which are indicative of conditions that arose subsequent to the reporting period. The challenge while preparing the Financial statements is to identify which events after the reporting period is to be considered as adjusting events and what disclosures are to be provided for the non-adjusting events.
The coronavirus outbreak occurred at a time close to the reporting date and the condition has continued to evolve throughout the time line crossing 31st Dec 2019. In 2019 end, few cases displaying the symptoms of a “pneumonia of unknown cause” were identified in Wuhan, the capital of China’s Hubei province. On 31st Dec 2019, China alerted the World Health Organization (WHO) of this new virus. On 30th January 2020, the International Health Regulations Emergency Committee of the WHO declared the outbreak a “Public Health Emergency of International Concern”. Since then, more cases have been diagnosed, also in other countries. Measures were taken and policies imposed by China and other countries. Gradually more information became available” The conclusion that the management need to make is whether the coronavirus outbreak is an adjusting event or a non-adjusting event. While making this judgement, the management shall take into consideration all the available data relating to the same including the nature and timeline of the outbreak including the measures taken. Learn more
IAS 1 – Presentation of Financial Statements (Ind AS 1 Presentation of Financial Statement / AS 1 Disclosure of Accounting Policies) – Going Concern
One of the basic fundamental accounting assumptions while preparing the Financial statements is that the entity will continue to operate for a foreseeable future. While preparing Financial statement, an assessment about entities ability to continue as a going concern should be done along with appropriateness of going concern assumption.
In assessing whether the going concern assumption is appropriate, the standard requires that all available information about the future (at least for a period of 12 months) from the end of reporting period should be taken into account. This assessment needs to be performed up to the date on which the financial statements are issued. The entity while making an assessment shall take into consideration the effects of the coronavirus outbreak. Learn more
IFRS 13 – Fair Value Measurement (Ind AS 113 Fair value measurement)
Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same—to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions i.e. on the reporting date the available information is taken into account while assessing the market condition. The company may also do some due diligence that are usual and customary while assessing the market condition as on the reporting date. Learn more
IFRS 9 – Expected Credit Loss Assessment (Ind AS 109 – Financial Instruments)
A credit loss is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive discounted at the original effective interest rate. It is no longer necessary for a credit event to have occurred before credit losses are recognized as per IFRS 9.
The measurement of expected credit losses of a financial instrument should reflect:
a) an unbiased and probability-weighted amount of potential loss that is determined by evaluating a range of possible outcomes;
b) the time value of money; and
c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
In assessing the expected credit loss, the management should consider reasonable and supportable information as on the reporting date. The assessment may vary from company to company depending upon the entity’s specific situation and its methodology in assessing ECL. It would particularly be important for the management to consider the effect of COVID-19 on receivable balances from countries that have been most affected by the pandemic. Learn more
IAS 36 – Impairment Assessment (Ind AS 36 Impairment of Assets / AS 28 Impairment of Assets)
The standard prescribes that the assets should be carried at their recoverable value. If the recoverable value is less than the carrying value, the asset shall be impaired to that extend. Recoverable value is higher of Fair value less cost of disposal and Value in use (present value of future cash flow)
The impairment tests are carried out on each reporting period when there is an indication for impairment. Events after the reporting period and information received after the reporting period should be considered in the impairment indicator assessment only if they provide additional evidence of the conditions that existed at the end of the reporting period. Similarly, the determination of the recoverable amount of an asset should only consider the information obtained after the reporting date if such conditions existed as on the reporting period end. This judgmental assessment should be based on the facts and circumstances. Learn more
Various other issues
Apart from the difficulties while preparing the financial statements, the accountants shall keep in mind many more things. We will try to give a glimpse of a handful of events where you should be alert as an accountant to keep things in place:
- Effect on Revenue Recognition: Due to the lockdown, it may not be possible to get customer approval to invoice and reorganize the revenue. This hits the profit and loss statement of an entity badly if their major customers are in countries like China, Italy, Korea etc.
- Decrease in collections – The cash flow will be badly affected as this pandemic is uncertain and many countries have called for a shut down. The team shall then focus on the other geographies to get the maximum collection to compensate the effect due to the coronavirus outbreak to keep your cash flow intact.
- Struggle to get information – Inability to obtain reconciliations and confirmations from suppliers, customers and others. Alternative procedures shall be encouraged to obtain the relevant information.
- Valuation and Write offs – The disruption in production cycles and supply chain could lead to potential write offs of inventories and other limited life assets. The outbreak will also affect the net realizable value of inventories (IAS 2 Inventories / Ind AS 2 / AS 2 Valuation of inventories)
The coronavirus outbreak is evolving and the management should keep an eye open for guidance published by the relevant accounting body .It is very important that the management shall not just evaluate and prepare to report on the impact of coronavirus on their own instead they shall seek the help of auditors and business consultants to ensure reliable and high quality financial statements. The path ahead may be uncertain, but a company that is diligent can take steps to tackle this tumultuous time and use it for their benefit. Don’t forget every challenge is an opportunity in hindsight.
For more insights on how to mitigate COVID-19,