The novel coronavirus is spreading around the world speedily. The pandemic has not only affected human life but financial markets and businesses as well. The impact of the virus has spread in every sector directly or indirectly. Out of these all, some of the worst-hit sectors include hospitality, aviation, and retail. With the passing time, more and more industries have been listed under the pandemic radar. Hence, complete lockdown being imposed across the globe. COVID-19 has a worldwide impact, affecting businesses, families, individuals, and even governments in a negative way causing a lot of financial woes
In the backdrop of the coronavirus outbreak, various companies will have a hard time doing accounting. During such a pandemic time, different aspects like identifying overdue tax assets, assessing impairments, or calculating revenues would be a challenge. The impact of the virus is on almost every part of the society, whether it’s social, geographical, or economic.
Implications Of COVID-19 Outbreak On Accounting And Financing
Impairment Analyses: Financial Woes
Impairment generally refers to the quantity by which the carrying amount of an asset surpasses its recoverable amount. Though it does not sound like something serious, it impacts a negative portion and may affect the business’s current productivity. Due to the coronavirus, there is the temporary stop of operations or an instant decline in prices that result in the lowering of revenues.
Apart from it, the ceasing of procedures results in a lowering of revenues and hence profitability. The management can use all such factors as the indicators that might need impairment testing. If any entity is unable to assess the impairment loss’s estimate due to the insufficiency of information, the same should be revealed appropriately.
Due to the outbreak, it is apparent that several businesses’ supply and requirements are affected. Such an area must get properly assessed systematically to determine the impairment. Some of the events, like inventory obsolescence or cash producing units whose market value decline is a sign of impairment. Another question that arises is the provision of trade receivables due to abrupt expansion in occupancy.
Overdue Tax Assessment: Financial Woes
An overdue or deferred tax asset is acknowledged for short-term deductible differences, unused tax credits, and unused tax losses. Taxable profit may be accessible against which the short-term deductible differences can be exploited.
Due to the COVID-19 outbreak, there arises an uncertainty over the expected profit for future years, and hence deferred tax assets acknowledged would be problematic.
Cash Management : Financial Woes
The quarantine situation of COVID-19 has created the biggest challenge of the cash management cycle for every business. It may result in concern over submission of necessary data to lenders, non-expense of dues of the loan payment, an audit of stocks for working capital prerequisites, and salary payment, which in turn influence the production cycle. All such points related to cash flow affect the financial institutions for acknowledgment of non-performing assets.
Statutory Dues: Financial Woes
Issues related to cash flow can also have an impact on the submission of statutory dues. It can include the Employee Provident Fund, Provident Fund, and Goods and Services Tax. It may result in a specific issue of an unfavorable opinion by auditors in their audit report.
Fair Value Measurement (FVM): Financial Woes
The coronavirus has affected the stock market, but other markets are also affected by the outbreak. Such a pandemic time poses challenges for assessing or measuring fair value. The schemes that were valuable and acceptable until December 2019 are abruptly not satisfactory in 2020. A change in the fair value measurement has impacted the disclosures. Thus it needs several companies revealing the valuation techniques and other input methods as used in FVM. Disclosures are important to permit users to understand if this pandemic has been recognised under FVM.
During the current situation, the instability of prices on different markets has also raised. If a complete fair value is out based on market prices, then there will be direct effects on FVM. However, if the fair value is based on the inputs derived from volatile markets, it can indirectly affect FVM. Therefore, special attention is required on the service price forecasting used to enhance fair value conclusions.
The Property, Plant, And Equipment (PPE)
Due to the outbreak, PPE may remain non-utilized or under-utilized for a specified period. The impact of the coronavirus may have affected the prediction residual and useful life of PPE. The considerable changes in which the asset is expected to be used may affect its future productive capacity. Apart from it, significant differences in the business climate can affect the value of the asset.
The notable accounting standards allow only to be familiar with revenue when the consideration may be collected. It would not be wrong to say that at the time of sale or depiction of service, one can expect ultimate collection. As revenue recognition entails entities to reveal the circumstances in which revenue recognition has been postponed until the declaration of considerable uncertainties. If the contract of an entity with the customer involves various components such as discounts, the entity must look whether its earlier approximations in this matter continue to be suitable.
It suggests that, along with the customer’s ability, it is also essential to consider the intent to pay that amount of consideration when it is due. In the present situation, to identify the customer’s ability with a long-term credit-period, it’s beneficial to pose a big challenge for revenue recognition. It inevitably creates a question for the auditor to admit recognized revenue. Specific revenue contracts might also become less profitable and even loss-making in the times of pandemic. Management should consider whether deals are in an awkward position and whether a provision needs to be documented.
Presentation Of The Financial Statement:
In the pandemic times, any drastically affected business may rationalize the low profitability with a higher presentation of line items. With income or expense items are materials, an entity shall reveal its nature plus amount discreetly. Such separate disclosure commerce may explain the facts and reason. Challenge would be while reviewing for quantification, for business to validate the rationale and for the auditor to certify the same.
Undoubtedly, it’s a tough time for the companies to organize the financial plan and deal with critical areas. With the expansion of time limit offered by regulators related to financial results, GST return, submission of corporate governance, and so on would support resolving issues. However, some relief in terms of time extension should be offered to banks, financial institutions, and NBFCs for non-performing assets assessment. The business companies, as well as lenders, can get some relief in terms of liquidity crises.
Impact On Employer Obligations And Benefits For Employee
The companies that are preparing provisional financial statements should also consider if newly defined assets or obligations need remeasurement or not. Generally, remeasurements in a company are taken into consideration when they arise; therefore, if adjustments at the reporting date are taken as material, then they are recorded at that date. Efficient measurement of plan assets and obligations are important when there is recognition for amendment, settlement, or curtailment. Apart from it, considerable market fluctuations may generate the need for a reorganized actuarial valuation.
As a result of the outbreak and affected economic conditions, some companies have reduced their workforce. If the company offers or has to pay termination benefits to the affected employee, management needs to first consider how and when to account for expenses. Determining a definite benefit obligation includes making several estimates and the use of assumptions. It can consist of appropriate interest rates, employee turnover, future salary, and many more. Several companies are firing employees due to the sudden fall in markets. COVID-19 pandemic has become the primary reason for the decline in the quality corporate bond rates.
Inventories : Financial Woes
Some of the companies are experiencing supply chain interruptions due to pandemic. Real estate companies or any other entity with inventories of under-construction properties might get impacted by a fall in property prices. Due to physical deterioration, contamination, damage, changes in price levels, or other causes, seasonal inventories might get exposed to the risk of loss. The companies should assess whether a change is required to the carrying value of their inventory. It helps them in gaining efficiency and high productivity even in the pandemic time.
However, if any entity’s production level is unusually low, it might need to review the cost of its inventory. It helps them to ensure about unallocated fixed overheads. These overheads are appropriately documented in profit or loss. Apart from well-established businesses, private companies and startups face severe challenges due to COVID-19.
Final Verdict : Financial Woes
So what businesses can do in the times of pandemic? Would it be fair to call for impairment, or one should treat this outbreak as a temporary situation? There can reduce a large number of scenarios; however, the discussion between companies and auditors would be central to determine such a position.
There has been an extension in the time limit as given by the regulators for further results. Hopefully, this will help in resolving the issues to a greater extent.