Covid-19, a global pandemic has affected the world economy including India leading to significant decline and volatility in Manufacturing, financial markets and other economic activities. So, there is a need to advise the preparers of Financial Statements to ensure that potential impact of Covid-19 is suitably considered in preparing and reporting their financial statements for the year ending March 31, 2020. We are highlighting few important areas which require attention in respect of financial statement for the year 2019-20
- Inventory Measurement – (AS 2)
As per accounting Standards, 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. The management may consider written down of inventories to net realizable value item by item.
This Accounting Standards states that the allocation of fixed production overheads to the costs of conversion is based on the normal product on capacity. Unallocated overheads are recognized as an expense in the period in which they are incurred.
Entities should assess the significance of any write-downs and whether they require disclosure in accordance with Accounting standards.
- Impairment of Non-Financial Assets – (AS 28)
- As per the accounting Standards, an entity is required to assess, at the end of each reporting period, whether there is any indication that non-financial assets may be impaired.
This Accounting Standards relies on an ‘economic’ criterion for the recognition of an impairment loss. An ‘economic’ criterion is the best criterion to give information which is useful to users in assessing future cash flows to be generated.
Due to COVID 19, there might be the temporary ceasing of operations
or an immediate decline in demand or prices resulting in lowering of revenues and profitability and reduced economic activity. These are the
factors that the management may consider as the indicators that may require impairment testing.
- Goodwill impairment
The standard requires that goodwill being tested for impairment at a level that reflects the way an entity manages its operations and with which the goodwill would naturally be associated. Due to COVID-19, there might be significant changes with an adverse effect in operations of a cash generating unit to which goodwill is allocated and therefore requiring additional focus and attention while testing of impairment of goodwill as at March 31, 2020.
The disclosure requirements in AS 28 are extensive. Depending on specific facts and circumstances, entities need to consider providing detailed disclosures on the assumptions and sensitivities considered for effects of the COVID-19
- Financial Assets
- In case of financial assets such as Loans, Trade Receivables etc., entities shall be guided by the requirements of AS 4, Contingencies and Events Occurring After the Balance Sheet Date.
- In respect of financial assets within the scope of AS 13, Accounting for Investments, entities shall carefully consider the requirements of making provisions for decline in the value of investments, which is other than temporary. In respect of financial assets within the scope of AS 13, entities must carefully consider the impact of COVID-19 on determination of fair value for valuation of investments classified as Current Investments
- In respect of Banks and Insurance Entities, preparers need to consider impact of COVID-19 on classification of Loans and Advances into Standard, Substandard, Doubtful and Loss categories in addition to the Prudential Regulatory requirements of RBI and IRDAI.
- In respect of recognition and measurement of derivatives within the scope ICAI Guidance Note on Derivatives, entities may need to consider the impact on key inputs/assumptions such as foreign currency rate, interest rate, etc. used in their valuation techniques, including the potential impact on hedge accounting.
Due to COVID-19 there can be changes in the terms of lease arrangements or lessor may give some concession to the lessee
- regarding lease payments. Such revised terms or concessions shall be considered while accounting for
- Discount rate used to determine present value of minimum lease payments of new leases may need to incorporate any risk associated with COVID-19.
- If any compensation is given/declared by the Government to the lessor for providing concession to the lessee, it should be considered whether the same needs to be accounted for appropriately as per AS 19. Whether any assistance received from government are government grants under AS 12.
- Due to COVID-19, there could be likely increase in sales returns, decrease in volume discounts, higher price discounts etc. Under Ind AS 115, these factors need to be considered in estimating the amount of revenue to recognized, i.e., measurement of variable consideration.
- Entities to whom AS is applicable, may have postponed recognition of revenue due to significant uncertainty of collection in view of the impact of COVID-19. AS 9, Revenue Recognition requires entities to disclose the circumstances in which revenue recognition has been postponed pending the resolution of significant uncertainti
- Provisions, Contingent Liabilities and Contingent Assets
- Onerous contracts are those contracts for which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. Unavoidable costs under a contract are the least net cost of exiting from the contract, which is the lower of the cost of fulfilling it and any compensation or penalties arising from failure to fulfil it.
- As a result of COVID -19, some contracts may become onerous for reasons such as the imposition of penalty due to delay in supply of goods or increase in cost of material, labour, etc.
- Management should consider whether any of its contracts have become onerous. The same should be accounted for as per AS 29. Management should disclose that it has assessed whether executory contracts are onerous due to adverse impact of COVID -19. If, the management is unable to assess whether some of the executory contracts have become onerous due to the inadequacy of information, the same should be disclosed.
- Going Concern Assessment
AS 1 Disclosure of Accounting Standards
AS 4 Contingencies and Events Occurring After the Balance Sheet Date
- The Financial statements are normally prepared on the Fundamental accounting assumptions that an entity is a going concern and will continue in operation for the foreseeable future.
- Management of the entity should assess the impact of COVID-19 and the measures taken on its ability to continue as a going concern. The impact of COVID-19 after the balance sheet date should also be considered in assessing whether going concern assumption is appropriate or not.
- Events occurring after the balance sheet date may indicate that the enterprise ceases be a going concern. It may be necessary for the management to evaluate whether it is proper to use the fundamental accounting assumption of going concern in the preparation of the financial statements.
- Income Taxes
AS 22, Accounting for Taxes on Income
COVID-19 could affect future profits and/or may also reduce the amount of deferred tax liabilities and/or create additional timing differences due to various factors. Entities with deferred tax assets should reassess forecast profits and the recoverability of deferred tax assets in accordance with AS 22, considering the additional uncertainty arising from the COVID-19 and the steps being taken by the management to control it.
- Property Plant and Equipment (PPE)
AS 10 require that useful life and residual life of PPE needs revision in annual basis. Due to COVID-19, PPE can remain underutilized or not utilized for a period of time. It may be noted that the standards require depreciation charge even if the PPE remains idle. Further, COVID-19 impact may have affected the expected useful life and residual life of PPE.
The management may review the residual value and the useful life of an asset due to COVID 19 and, if expectations differ from previous estimates, it is appropriate to account for the change(s) as an accounting estimate in accordance with Accounting Policies, Changes in Accounting Estimates and Errors and AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies.
- Borrowing Costs
AS 16 Borrowing Costs
The standards require that the capitalization of interest is suspended when development of an asset is suspended. The management may consider this aspect while evaluating the impact of COVID-19.