IThe outbreak of coronavirus is having a widespread impact on the global economy. To consider the impact the outbreak may have on the financial reporting, entities must carefully consider their unique circumstances and risk exposures. The Accounting regulators and standard-setters have had to scramble to the issue guidance given to financial statement preparers for upcoming quarterly and annual financial reporting. This has assumed direct regulatory significance since it has been set by the market regulator. But in cases like India, this has taken the form of “advisory guidance”, like an auditing advisory issued by ICAI in March 2020.
The effects of the crisis for the companies with financial periods ending after December 31, 2019, will be primarily visible in financials of February and March 2020. But, these have already taken various forms such as declining commodity prices and sharp falls in asset values, shrinking revenue, and margins across financial markets. Other than the impact from the direct income statement there can be other financial statement consequences from deferment of capital projects, contract renegotiations or terminations related to leases, employee compensation, and fixed price commitments under the procurement contract. And, all of these effects of development are likely to be revealed in company financial statements through the quarterly financials of 2020. Thus, all the published results commencing from March 2020 quarter-end will be scrutinized by regulators, shareholders, and market participants.
One of the major areas to be focused on is the ‘going concern’ assumption in the financial statements. Companies prepare financial statements based on the assumption that the underlying business is viable and does not face an existential doubt in the foreseeable future. In the upcoming financial statements, disclosing and determining whether the business is a going concern will involve significant judgments and measurement uncertainty, since the full potential crisis is highly uncertain. The other area is concerned with carrying values of assets on a balance sheet. Almost the entire range of non-financial assets including inventories, receivables, deferred tax assets, fixed assets, and intangibles such as goodwill are in scope. There may be significant income statement impact through inventory write-downs or uncertainties in revenue recognition. Impairment testing for property, plant, and equipment may be widely triggered and it may be a huge challenge to demonstrate reliable cash flow projections necessary to determine the extent of impairment.
In recent years, under Generally Accepted Accounting Principles(GAAP)-both IFRS and US GAAP, the degree of accounting estimations required to be made by the companies has significantly increased. This is because of the recently issued and adopted accounting standards in areas such as fair value measurements of financial instruments, revenue recognition, and expected credit losses on receivables and loan portfolios of financial institutions. For this time, this becomes a challenge to the companies and auditors since the robustness of the estimation process and soundness of judgments will play a key role in arriving at reliable accounting values and clear disclosures about the impact of the crisis.