Acknowledging the impact of COVID-19 disruption on financial statements, the Institute of Chartered Accountants of India on March 31 issued an advisory on potential impact in preparing and reporting the financial statements for financial year 2019-20. It covers areas which require special attention of auditors in current scenario like valuation of inventory, going concern, cash flow impact, subsequent events etc.

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The impact on financial statements is industry specific and also company specific depending on the exposure to financial instruments and transactions. The biggest impact, however, will be on the going concern assumption for any business. It will not only have an impact on current activity but also on accounting estimates such as revenue recognition write offs, expected provisioning etc. Necessary disclosures will have to made such as material uncertainties that might cast significant doubts upon entity’s ability to continue as a going concern.

This is likely to have a significant impact on financials, automobile, retail, commodities, hotels, media, aviation, capital goods and infrastructure sectors.

Asset impairment in some sectors

Automobiles, Hotels, retail sector, oil and gas will be impacted due to lower demand and hence lower realizations. This may also act as a trigger to test impairment of non-current assets. Goodwill and intangibles with finite life would continue their impairment checks with stringent parameters.

Expected Credit Losses (ECL) provisioning could impact financials

Financial instruments (covered under Ind-AS 109) such as loans, trade and other receivables, investments in debt instruments, financial guarantees, and loan commitments are subject to impairment loss, measured as per expected credit loss approach in the income statement. Sectors such as financials (NBFC), capital goods, autos (for their captive financing book), and IT are exposed (primarily in loans/receivables) to sectors/companies that may be affected by the COVID-19 situation.

Inventory losses

Ind-AS requires inventory to be valued at lower of cost or net realizable values. This may result in a writedown in inventory valuations, primarily in the commodity and retail sectors.

Lease changes may impact aviation, retail, media and hotels

Changes may be observed in the terms of lease arrangements, or lessors may give some concessions to lessees in lease payments or in the form of rent holidays. Such revised terms or concessions shall be considered when accounting for leases, which may lead to the application of accounting pertaining to lease modification.

Provisioning may be impacted

Companies in the capital goods and IT sectors, which recognize revenues on the basis of long-term contracts, may need to assess the enforceability of existing or new contracts (including renegotiations/modifications).

Ind-AS requires financial assets/liabilities to be fair valued at each reporting period and corresponding gains/losses to be provided through the income statement. Also, DTA (deferred tax assets)/DTL (deferred tax liabilities) recognised by companies may be impacted due to a change in the estimates of future profit/impairment of assets. These changes are likely to impact companies across sectors.

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First Published:Apr 16, 2020 7:25 PM IST