COVID 19 Outbreak – Industry Impact and Impairments

The ongoing COVID 19 Outbreak in the world has created an unprecedent significant risk for the business around the world. World Economies irrespective its developed and developing nations are facing lockdown and has created significant shortfall of revenue.

The ongoing crises is going to have cyclic impact over global economy where shortfall of money in the hand of people will lead to shortfall of consumption, that will further lead of downfall in industrial outputs and will result in unemployment and dis-investments. This cycle will continue until intervention by governments through mass investment and consumption. IMF considering the current situation, have predicted a global recession which can be worse than the world saw in 2008-09.

In the context of India, things seem more complicated, where before the crisis itself, there was slowdown in economy and government had exercised all its measure from fiscal to monetary to take it on track. The current crisis is going to be a big setback for Indian Government in its attempt to revive economy. Moody’s which had predicted growth rate of 5.8% for FY 2020-21 in Indian Economy, has slashed its prediction twice within 15 days to 2.5%.

The above factors are going to have devastating impact over the revenue of the companies. The current situation has given rise to a strong external factor for the impairment of assets in the books of corporate. Due to current situations, companies will be compelled to revise its future business projections and growth prospects.

Companies which are making negative profits due to initial business phase or which just started production or going to start in near future are more exposed to such impairment as current crisis may attract huge difference between expected cash flows at time of investment decision and current projection and this may even leads to impairment on newly capitalized plant and machinery and capital work in progress of the companies.

Professionals while calculating value in use for such investments, need to re-consider future growth rate considered previously for determination of terminal value. Downward revision of projected cash inflows and growth rate in terminal value will significantly decrease the amount of value in use of assets. However, downward revision in interest on government bonds which are generally considered for the determination of risk-free return can provide little help by lowering the discount rate on the projections.

Auditors of the companies need to be careful on the matter as management in most cases will be unwilling to reconsider business forecast due to outbreak stating current situation as short term, however long-term impact of this can’t be overruled.