How COVID-19 impacts Financial Reporting for Businesses

COVID-19, a novel coronavirus infectious disease, spreads and destroys people rapidly around the world and has been identified as a global pandemic of the WHO. COVID-19 has not only impacted people’s wellbeing worldwide but also caused significant damage to the global economy, with effects on financial results and studies.

This global pandemic can hurt many countries, industries, and individuals. As businesses with private limited company registration in India and LLP companies are already allowing Work From Home by filing up “CAR” form.. The impact of the outbreak on their accounting and financial statements need to be evaluated urgently. In this context, ICAI released an advisory to notify the preparers of the financial statement on how to incorporate the impact of COVID-19 on financial statements for the year ending 31/03/2020 on certain primary Indian Accounting Norm (IND AS) and Accounting Standardized Standards (AS).

Below are some of the most significant accounting and financial reporting criteria for businesses.

1. Concerned Assessment 

The financial statements are typically prepared under the basis that an institution is in transition and will run shortly. Management will also need to determine whether the current events and circumstances trigger significant concerns as to the capacity of the company to survive as a continuing concern.

When deciding whether or not an agency concerns itself, management will consider all available potential details for at least the following 12 months after the conclusion of the reporting period. If the management wants to liquidate the company or stop operation after the reporting period because of the effect of the COVID 19 organization, reports cannot be prepared on an ongoing basis. Often needed reports, according to Accounting Principles, are made, such as material uncertainty, which could cast significant doubt on an entity’s ability to continue as a continuing concern.

Also Read: Significance of Force Majeure in Corona Times

2. Measuring Inventory

COVID 19 can lead to sales decline and also the decline in selling prices could lead to inventory obsolescence and decline in inventory mobility. Therefore, management should consider writing off the inventory of its Net Realizable Value, i.e., NRV. NRV Accounting principles also provide light on the distribution based on the usual efficiency of the output of fixed overheads. As a result of low output or idle facility, the amount of fixed overhead allocated to each production unit is not increased. Unallocated overheads are known as costs during the time incurred.

All companies must review the reports by reporting the inventory in compliance with the accounting principles.

3. On Leases

(a) In the case of a change in terms of leasing arrangements and agreements resulting from COVID 19, such as lease payment concessions, etc., these revisions shall be implemented. (The revisions planned shall not be incorporated).

(b) the discount rate used to calculate new lease liability present value may be needed to incorporate any COVID-19 risk.

(c) if the government offers some fee to the lessor to grant the lease concession, the same is treated as the lease amendment under IND AS 116. Or, if the assistance obtained from the government is treated as grants under IND AS 20.

(d) Test whether the rate of discount used for the value of rental liabilities contains COVID 19’s risk effect.

(e) Check that any lease deal has become costly due to COVID 19 crisis.

All organizations to which AS 19 applies must recognize all circumstances as referred to in IND AS 116 but as regards AS 19. If contracts are costly, these contracts must be paid for in compliance with AS 29.

4. Revenue and Impact Communication

Organizations must have to do financial reporting of any effect of COVID 19 on revenue value, number, timing, and uncertainty as per applicable accounting standards. Factors such as sales growth, high price discounts, etc. due to COVID 19 need to be weighed when calculating the amount of revenue to be recognized. They will also consider similar impacts on trade receivables, including projections of potential credit losses.

These organizations may need to delay revenue payment due to collection uncertainty due to COVID 19 impacts. Such deferment shall also be disclosed under AS 9.

5. Liabilities and Contingency Provisions

– The business covered by IND AS 37

(a) Due to COVID 19, some contracts are required to become costly. If such agreements are found, they should be acknowledged in compliance with IND AS 37. All the assets committed to these contracts should be checked for disability before accepting an onerous contract. (Onerous contracts are those contracts where the eventual expense of meeting the duty exceeds the benefits to be obtained from the contract). It is also advisable to do the financial reporting accordingly if any executive agreements are transformed into costly because of the impacts of COVID 19.

(b) Insurance claims can only be reported by individuals when the insurance agencies have approved the claims, and the recovery is almost assured.

Because of COVID 19, the decision must be extended for the estimation of damage and claim provisions.

– Entities subject to AS 29:

If, because of COVID 19, any contracts are turned into onerous, then such contracts must be remembered in compliance with AS 29. If any executive contracts are converted into costly, these contracts are disclosed. When management is unable to determine whether the executive contract is translated into costly or not because the information is not available, then those contracts are also to be disclosed.

Also Read: Accounting for Startup – why your business needs bookkeeping services?

6. Income Tax

COVID-19 can impact potential earnings and/or can minimize deferred tax liabilities and/or generate additional temporary deductible differences because of different factors. Given the increased uncertainty arising from COVID-19 and the management’s measures to monitor it, organizations with deferred tax assets will reassess their expected income and the recoverability of deferred tax assets in compliance with Ind AS or AS as necessary based on the organization.

7. Plants, Property, and Equipment

Ind AS 16 and AS 10 require a yearly analysis of the useful life and residual life of the EPI. It should be noted that depreciation charges are needed for quality, even if the PPE remains idle. Also, the effects of COVID-19 may have impacted PPE’s life expectancy and residual life.

Management may determine the residual value and useful life of an asset according to COVID-19, and it is reasonable, as the accounting estimate according to Ind AS 8 or AS 5, which applies to the organization, to account for the changes in expectations varying from earlier estimates.

8. Things to post Balance Sheet Works

Entities shall report substantial discrepancies in identification and calculation that may arise from the COVID-19 outbreak when assessing different assets and liabilities. They should also report how the effect of COVID -19 has been handled on the entity’s financial situation and financial results.