Testing the accountant’s mettle in tough times

Exports have declined across Asia in recent months due to reduced demand from North America and Europe, thereby impacting commodity pricing and value chain sustainability. Production levels are expected to remain low in the near future.

stakeholders’ expectations

In the current market environment, businesses are struggling to manage stakeholders’ expectations — that is, long-term value enhancement. Entities are affected by the declining asset values of their investments and employee benefit plans, as also the increased cost of borrowing. As many economies face recession, there will be widespread impairment of goodwill and other tangible and intangible assets. Financial reporting is an area in which companies will have to revisit their positions. Given the tremendous pressure on the bottom line, compliance with accounting and disclosure requirements would be a challenge. Some of the key issues are set out here, but the unique circumstances and risk exposures for each reporting entity must be assessed comprehensively. The financial statements should capture and adequately address/ disclose all significant issues to make for an informed and meaningful reading. To begin with, the focus is on the fundamental principles of preparing a financial statement.

Going concern

The circumstances under which an entity operates may challenge the ‘going concern’ basis of preparation. Key considerations include the ability to draw revised business plans with a high degree of reliability and assess the entity’s ability to realise its assets, meet its commitments and obligations, and generate the required resources to operate without interruption.

Consistent application

The basis of assumptions and the estimates used in different areas of accounting such as assessment of impairment, accrual of liabilities and so on should be applied consistently. Changes, if any, should be critically evaluated to ensure they are appropriate, given the changed environment.

Accrual

It is critical to ensure that all impairments in assets and potential liabilities are appropriately accrued. Key accounting/ disclosure aspects include

Determiningfair values in inactive markets: It is important to look at the fair values of financial instruments, non-financial assets — assets held for sale, inventory valuation, and pension and other employee benefit plan valuations.

Revised economic outlook indicating impairment and lack of recoverability for many assets: One must look at cash flow projections, impairment of non-financial assets including goodwill, and events and circumstances indicating an impairment of goodwill, equity-accounted interests in associates and joint ventures, investment properties carried at cost, and recoverability of deferred tax assets.

Reduced availability of credit and increasing cost of finance: This would largely include looking at breaches in borrowing covenants and liquidity risk management.

Impact on hedge accounting: This would largely include impact on credit risk adjustments on hedge accounting, highly probable assessments in cash-flow hedge accounting, and hedging forecast debt issuance.

Critical enhanced disclosure requirements would include key sources of estimation uncertainty, fair value, market risk, impairment and events after the balance-sheet date

To summarise, accountants face a tough task in terms of fitting the business scenario within the applicable accounting and financial reporting framework — and this is a test of corporate governance. So, corporate India should hope and plan for the best — and, at the same time, be consistent in its financial reporting practices.

The author is Partner, Deloitte Haskins & Sells

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