Normally, March and April are busy months for businesses and auditors. But the lockdown following the cornavirus has brought along with it a set of new challenges and concerns.

Corporate entities, businesses, auditors, regulators and all stakeholders have a task ahead in achieving balance in concluding the compliance requirements.

While SEBI and MCA have provided certain relaxations, the financial year end still remains March 31, 2020. Therefore, it’s a challenge to capture the potential impact of the Covid-19 lockdown scenario in the financial statements.

According to Lokesh Vasudevan, Partner, Brahmayya & Co, “The current generation of our audit fraternity, would not have come across such a sensitive scenario. The inability to perform suitable audit procedures is due to the unforeseen situation. Though existing accounting standards and relevant auditing standards provide reasonable guidance, the advisory issued by the Institute of Chartered Accountants of India (ICAI) will help in deeper application and understanding, given the current situation.”

This pandemic has an all-round impact, across all financial elements ― assets, liabilities, income and expenditure ― both present and future. Given the circumstance, the objective of achieving true and fair presentation of financial position to stakeholders is most challenging.

The ICAI Advisory embraces various aspects including assessment of significant inventory write-downs, treating the outbreak as one of the indicators to trigger impairment testing for non-financial assets, importance of fair value measurement and factors impacting revenue recognition.

Due to significant decline in business operations, revenues will be impacted and uncertainty on realisation of dues would result in substantial recognition of expected credit losses.

The CFOs or rather virtual CFOs working from home have begun reassessment of their contracts with lenders, vendors, customers and service providers to assess the entity’s legal obligations during such lockdowns.

Meanwhile, the debate continues in regard to protection under the force majeure clause in contracts.

Vasudevan further added, “The Board’s assessment of both business and credit risk should form the pillar for such fair presentation and disclosure. The auditors should also exercise higher degree of professional scepticism and ensure that logistical challenges should not impair audit quality.”

In its statement, Motilal Oswal mentioned, “Our discussions with various accounting experts indicate the level of impact will depend on the industry under which the company operates as well as company-specific exposure to financial instruments/ transactions.”

On the accounting front, this would not only impact key financial statements (income statement and balance sheet) but could also raise questions on the going-concern assumptions of some entities.

It further says, “The outbreak, followed by the lockdown, would not only have an immediate impact due to reduced activity levels but also potentially change various accounting estimates, leading to an increase in write-offs, expected credit loss/provisioning, fair valuation assessment of various assets and liabilities, and revenue recognition, among others.”

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

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