As of March 2020, The whole world is dealing with the Coronavirus outbreak, WHO or World Health Organisation declared Coronavirus as a “global pandemic”. The Coronavirus is affecting almost everything including the social, political, and economic foundation of the world.
As per experts and the aftermath of this situation will vary from nation to nation, field to field industry to industry and enterprise to enterprise. It is also extremely difficult to state how badly an industry is affected, and what will be the impact of all these on the financial growth and condition of our nation. Due to the spread, all the business operations are temporary suspended which will ultimately result in a drop in demand and supply. This will result in the drop-down of revenue numbers and the economic activity of the nation is expected to come to a halt.
ICAI which stands for the Indian Institute of Chartered Accountants of India has released a report In accordance with the appraisals given by the Indian Government and other general well being domestic and international authorities.
COVID-19 and its Adverse Financial Implications:-
In this epidemic time, there are certain points that are issued by the ICAI in accordance to direct the financial statement formulators and for reporting the same for the Financial Year ending 31st March 2020.
All these statutory guidelines are issued to ease the current financial enigma of the country. It is focused more on some of the specific sections of the Accounting Standards which need some necessary attention. ICAI also circulated this Accounting Advisory that contains all the required amendments to deal with the current situation.
It keeps in mind the various entities that follow the IND AS and also the entities that fall under the below-mentioned sections:
- Companies to whom Companies, Rules of Accounting Standards 2006 is applicable;
- Non-corporate entities to whom AS issued by the ICAI are applicable.
Impact of COVID-19 on Financial Reporting:-
#1) Inventory Measurement:
According to the AS 2, IND AS 2, Inventory and its valuation, it is important to write down the inventories to the net realizable value. This has been included due to the mobility of inventory, reduced selling prices of goods, and stock obsolescence in the market.
#2) Disablement of Non-financial assets:
According to the AS 36 and AS 28, and considering the losses of the non-financial assets, in the current financial year, the entities have the right to assess if there is any sign of non-financial assets that may be impaired. In the existence of such a condition, the entity can get the estimated recoverable amount of the asset.
It can be possible so in such a case, the management may use these as an indication for the impairment testing for AS 36 and AS 28.
#3) Impairment Losses and Financial Instruments:
The approach was introduced in the year 2008 to face the global slowdown and to overcome the credit-loss provisions by using a broader aspect of the credit information.
According to it, the financial instruments within the scope of AS 109 are not measured at the relevant value of profit and loss. Additionally, the Receivable Contracts and Lease follow the impaired loss recognition and the measurement on the basis of an approach called Expected Credit Loss.
The enterprises on which AS 19 and AS 29 are applicable, there might be lease agreements between the two parties. Now, In order to fight against COVID-19 impact, the lessee may be given a financial concession by the lessor. However, these types of information should be maintained in the books of accounts for leases.
Due to this hard time, there is a possibility of a significant increase in sales returns, other prevailing discounts, volume discounts decreases, etc.
As Per IND AS 115, all these factors need to be considered for estimating the revenue amount that needs to be recognized. It also takes care of guidelines for the nature, amount, and unlikeliness of the cash flows resulting from the activities that generate revenue.
Due to the impact of epidemic individuals, companies or 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:
Some contracts in the process may become difficult due to the reasons such as the cost of material/labor, etc. In existence of such case, the management needs to find out its contracts that may have become onerous and then they need to disclose them.
IND AS 37 also directs to check the assets for impairment before any liability for the onerous contract is recognized on them. Additionally, there are specific changes in the treatment of restructuring costs and insurance claims to deal with this kind of situation.
#7) Modifications or Termination of Contracts or Arrangements:
It follows and states that companies are eligible to modify or terminate contracts that come under Ind AS and the ASs or guidelines mentioned in it. While following those guidelines, entities are also advised to consider the specific requirements of those standards.
#8) Going Concern Assessment:
This assessment is applicable to the entities that follow IND AS 1 and AS 10. It also states that the firm will continue to operate in the foreseeable future. Normally the financial statements are prepared annually or for a period of 12 months. It should be assessed whether it is appropriate or not due to the consequences of COVID-19.
The management also needs to understand that if the firm continues to operate as a going concern after the reporting date or not. It is mandatory for them to evaluate if the fundamental practices of accounting can be followed.
#9) Income Taxes:
Coronavirus affecting everything and it is expected that it could decrease the number of deferred tax liabilities and might also affect future profits. The firms with deferred tax assets need to revalue the estimated profits and the recoverability of deferred tax assets in consideration with Ind AS 12. Meanwhile, the board should also review the plans and road map to distribute the profits among its subsidiaries.
#10) Consolidated Financial Statements:
According to Ind AS 110 and AS 21, the financial statements of the parent and the subsidiary companies used in the formation of the consolidated financial statements need to be drawn on the same accounting date. But the difference between the reporting dates should not be more than 6 months.
#11) Property Plant and Equipment (PPE):
Ind AS 16 and AS 10 states that the useful life and the residual life of PPE need to be revised on an annual basis. However, the PPE may remain under-utilized for an unknown period of time due to the COVID 19.
Here, the management should value the useful as well as the residual life of the assets and account for any changes if the expected details differ from the previous estimates.
12) Presentation of Financial Statements:
The financial statements presentations require the entities to reveal the asked data or information about the future unforeseeable events and the predictions it derives from the possibilities of changes at the end of the financial period.
We would like to mention here that Ind AS 21 requires the corresponding details for preparation and its preparation and its presentation of financial statements. Now when the COVID-19 will cause damage to the financial position, the financial statements makers need to present disclosers and adequate explanatory notes.
13) Borrowing Costs:
This one requires the suspension of interest on capitalization when the development of an asset comes to a pause or stop while dealing with this hard time.
14) Post Balance Events:
According to Ind AS 10, management is needed to divide the events into two categories i.e Adjusting Events and Non-Adjusting Events.
It states that the entities must disclose all the details related to the measurement and identification of uncertainties that happened because of the Coronavirus Outbreak. Entities also need to mention the information about their plan and roadmap to tackle all the problems that occurred due to this kind of global pandemic.
15) Interim Financial Reporting:
The application of recognition and measurement is also equally validated in this standard too. Ind AS 34 stats that, there should be greater usage of estimates in the interim financial statements but the details need to be verified, thus need to be reliable.
Ind AS 34 as well as AS 25 requires to provide information about events and transactions that are significant to assess the financial position and performance of the firm since the last reporting period. It states that additional details should be provided to tackling the adversaries of the COVID-19 and the ways to contain the same.
All the above are the primary alterations recommended by the ICAI’s Accounting Advisory which was prepared to face the future implications of the Coronavirus outbreak in India.
Need to be considered that almost every entity will have a different outcome while dealing with this scenario. Therefore, it is mandatory to follow the above alterations while keeping the fundamental basics of accounting practices intact and accurate. All these statutory guidelines are to ease the current financial problems of the country due to the Coronavirus outbreak.