In this pandemic situation, all sectors are experiencing a major shift in their area of operations. Market volatility, economic slump, unemployment, stoppage of production activities, social distancing, and all other commotions are deeply crippling the financial activities. According to Deloitte’s Financial reporting, even accounting practices are not immune to these changes as the shockwaves of Covid19 has hit across all sectors globally. But the intensity varies according to the nature and disposition of the industry.
Given the evolving nature and outbreak of uncertainties, one cannot simply fathom the depth of the Covid19 impact. The ability of entities to remain under operation is apprehensive. If the company decides on a going-concern assumption, it will have to disclose the uncertainties in their financial reports and on the issuance of financial instruments. As the investors are bound to know the risk they are undertaking.
The coronavirus outbreak has led to increased government interventions in the financial sector. For this reason, while issuing financial instruments utmost watchfulness has to be maintained by the company as there are a lot of changes regarding rules and regulations. And also, the risk associated has to be studied upon.
Hedging is a risk reduction technique wherein an entity uses a derivative to balance future changes in the fair value or cash flows of an asset or liability. As the sales curve is sinking, all the predetermined transactions might have to be rechecked as there is a probable chance of cancellation or postponed sales. If not a complete cancellation, a decrease in the volume of sales and credit transactions can be expected. As a part of risk management, if a company applies hedge accounting, they will have to consider whether the amounts accumulated in a cash flow hedge reserve needs to be classified as profits or losses
Expected credit loss assessment (ECL)
Deteriorated credit quality along the supply chains can be predicted as large-scale business operations are disrupted which can lead to liquidity concerns. In response to such heavy losses, the government has introduced certain relief measures. ‘’The measurement of ECL should be based on an unbiased, probability-weighted amount that is determined by evaluating a range of possible outcomes and reflecting the time value of money’’, stated by EY, one of the big-four accounting firms.