The new pandemic, Covid-19, has proved to be testing for humanity. Death tolls and confirmed cases have been increasing alarmingly across countries. The business fraternity are sat crossing their fingers as the disastrous consequences of Covid-19 on economy and business rise beyond their imagination. Stock markets have hit bottom in several countries, and many governments are still contemplating the mechanisms needed to pull back the economy from the imminent slowdown. The Government of India has ordered a nationwide lockdown to curb the spread of this pandemic, and has also come up with various stimulus packages for the economy.

On the other side, financial institutions have revised India’s growth forecast for 2020-21 to an drastically low levels, not seen since the 2008 global financial crisis. Moody’s hinted a decline in the GDP growth rate and projected a 0.2 per cent growth for FY 20, a drastic shift from their earlier forecast of 2.5 per cent. Similarly, S&P cut India’s growth outlook to 1.8 per cent. CRISIL too lowered its GDP growth projection to 1.8 per cent. The uncertainty mounting over India’s economy has severed the hopes of many stakeholders.

Accounting provisions

As the Covid-19 outbreak is rapidly spreading in India, particularly at the time of book closure, how it is going to impact the accounting and audit practices is a serious concern for many. Business entities would be indulging in efforts to mitigate the impact of this catastrophe on their operations. Financial statements would also need to account for such eventualities while reporting. As accounting involves the use of judgment on the expected cash flow stream and expense of a company, uncertainty in the business environment would require revision of estimates on revenues and expenses. For instance, companies would have accounted for some percentage of their accounts receivables as bad debts.

Given the current scenario, there is a possibility of delay or failure to repay from creditors. Companies need to figure out an additional provision for bad debts. For banks, loan-loss provisioning is going to be affected more, since their clients may not be able to pay back the loan in due time. Due to the ongoing plant lockdown and lack of maintenance and servicing of equipment, the estimated life of a physical asset needs to be reassessed. Eventually, this would affect the depreciation charged on such assets.

With the prevalence of many holding companies and their listed subsidiaries in India, the volatile stock market would severely hit the balance sheet of holding companies. Since the stock price of many firms is at their record low, holding companies need to adjust or record an impairment of their investment in subsidiaries in their balance sheet. Companies also need to prepare themselves with certain unusual or infrequent items in their accounts (eg, wages to daily labourers during the lockdown and other temporary social security measures adopted).

Moreover, most of the accounting treatments rely on the assumption of “going concern”, which says that the company is going to exist forever, and accountants make estimates based on this assumption. As the Covid catastrophe is spreading across the globe, there needs to be much caution and care while making judgments on estimates based on the “going concern” principle.

ICAI advisory

Against this backdrop, the accounting regulator of the country, the Institute of Chartered Accountants of India (ICAI) has issued an advisory on the “Impact of Coronavirus on Financial Reporting and the Auditors Consideration”. This advisory attempts to familiarise the preparers and auditors with some critical areas that require special attention amid this pandemic.

Firms may consider writing down inventories to net realisable value due to the ongoing disruption in the supply chain, reduction in sales price or obsolescence of inventory, says the ICAI’s advisory. Assets might have to test for impairment as there may be a situation where it is difficult to account for the ability of an asset to generate cash flows in the future due to events such as temporary ceasing of operations and an immediate decline in demand or prices.

Another critical area of attention required is concerning fair value measurement. Fair value accounting is the practice of measuring assets and liabilities at their current market value. For that, Ind AS 109 and Ind AS 16 prescribe certain fundamental principles on the definition and determination of fair value. As available market price is a crucial element in fair value measurements, the current volatility in the prices of financial instruments poses significant challenges for the firm to arrive at the fair value for financial assets. Further, it also requires that transactions in an orderly market base the quoted prices. There should not be any unnecessary pressure to sell or distressed selling in the market as they do not resemble orderly transactions.

The ICAI guidelines also warn that, due to Covid-19, there could be a possibility of an increase in sales returns, decrease in volume discounts, higher price discounts etc. Therefore, the amount of revenue to be recognised needs scrutiny given the scope of Ind AS 115.

Auditing changes

Auditing would also face serious issues as it would be difficult for auditors to access the client location to conduct the stock audit and cash audit amid this situation. However, the quality of auditing cannot be compromised, says the ICAI’s guidance. Auditors have to come up with alternate arrangements to conduct auditing effectively. Perhaps, auditing without a site visit would be an ideal option, given the current scenario.

Meanwhile, the applicability Companies (Auditor’s Report) Order (CARO) 2020, which mandates newer and more stringent audit rules, has been postponed to the next financial year.

It is expected that the regulators would come up with more relaxation on auditing and publishing of financial statements, as companies require more time for book closure due to this black swan event. Since the economic impact of Covid-19 continues to evolve rapidly, firms should monitor this situation carefully and liaison closely with their board of directors, external auditors and other stakeholders, including the regulators, as the situation progresses.

The writer teaches at the Department of Accounting and Finance, Jindal Global Business School, OP Jindal Global University. Views are personal

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