Impact of Coronavirus on Financial Reporting:

Friends Hi,

Briefing some significant impact on Financial Reporting due to COVID-19.

There’re various significant impact in financial reporting due to have COVID-19, List out below some of the relevant impact in the financial reporting through the application of IND AS/AS

1            Inventory Measurement (Ind AS 2 and AS 2)

In accordance with Ind AS 2 Inventories, and AS 2 Valuation of Inventories, it might be necessary to write down inventories to net realisable value due to reduced movement in inventory, decline in selling prices, or inventory obsolescence due to lower than expected sales.

Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Net realisable value refers to the net amount that an entity expects to realise from the sale of inventory in the ordinary course of business. The management may consider written down of inventories to net realisable value item by item.

Entities should assess the signi?cance of any write-downs and whether they require disclosure in accordance with Ind AS 2/AS 2 as well as paragraph 98 (a) of Ind AS 1, Presentation of Financial Statements, and paragraph 14(a) of AS 5, Net Pro?t or Loss for the Period, Prior Period Items and Changes in Accounting Policies. It is unlikely that the normal production capacity is to be reviewed for allocating ?xed production overheads for the year 2019-2020, because of adverse impact on the utilisation of the production capacity due to the impact of coronavirus on the overall economy or the segment (s) in which the entity is operating.

Ind AS 2 and AS 2 also provide that the allocation of ?xed production overheads to the costs of conversion is based on the normal production capacity. The amount of ?xed overhead allocated to each unit of production is not increased as a consequence of low production or idle plant. Unallocated overheads are recognised as an expense in the period in which they are incurred.

2            Fair Value Measurement:

Entities to whom Ind AS is applicable: Ind AS 113 Fair Value Measurement

Individual Ind ASs such as Ind AS 109, Ind AS 16 etc. prescribe when to measure an asset or liability at fair value and how to recognise the resultant fair value gains and losses i.e. in pro?t or loss section or other comprehensive income section of Statement of Pro?t and Loss. Equally, important is Ind AS 113 Fair Value Measurement, which lays down certain fundamental principles in respect of Fair value, its de?nition and how to determine it? In this context, the following are the critical factors to be considered in determining fair value both for measurement or disclosure requirements by the preparers.

Critical Factors to Consider

Ind AS 113 recognises the fact that there are di?erent ways in which fair value is determined i.e. it can be based on observable market price (quoted price in an active market – Level 1) or application of valuation techniques (Level 2 and Level 3) as of the reporting date.

The current ?nancial and capital market environment across the globe has got a?ected by the rapid spread of COVID-19 and may have developed the following features.

Signi?cant volatility or indications of the signi?cant decline in market prices of ?nancial instruments like equity, bonds and derivatives.

Signi?cant decrease in volume or level of activity.

The above features may need adequate management consideration and professional judgment to determine whether the quoted prices are based on transactions in an orderly market. It may not be always appropriate to conclude that all transactions in such a market are not orderly. Preparers should be guided by the application guidance in Ind AS 113 that indicates circumstances in which the transaction is not considered an orderly transaction.

Entities to whom AS is applicable: AS 13 Accounting for Investments

In respect of ?nancial assets within the scope of AS 13, entities have to carefully consider the impact of COVID-19 on determination of fair value for valuation of investments classi?ed as Current Investments

 3          Leases:

Entities to whom Ind AS is applicable: Ind AS 116 Leases

Due to COVID-19, there may be changes in the terms of lease arrangements or lessor may give some concession to the lessee with respect to lease payments, rent free holidays etc. Such revised terms or concessions shall be considered while accounting for leases, which may lead to the application of accounting relating to the modi?cation of leases. However, anticipated revisions should not be taken into account

Variable lease payments may be signi?cantly impacted, especially those linked to revenues from the use of underlying asses due to contracted business activity

Discount rate used to determine the present value of new lease liabilities may need to incorporate any risk associated with COVID-19.

If any compensation is given/declared by the Government to the lessor for providing concession to the lessee, it should be considered whether the same needs to be accounted for as lease modi?cation as per Ind AS 116 or whether assistance received from Government is to be accounted as government grants under Ind AS 20.

Entities to whom AS is applicable: Leases (AS 19, AS 29)

Due to COVID-19 there can be changes in the terms of lease arrangements or lessor may give some concession to the lessee with regard to lease payments. Such revised terms or concessions shall be considered while accounting for leases

Discount rate used to determine present value of minimum lease payments of new leases may need to incorporate any risk associated with COVID-19.

If any compensation is given/declared by the Government to the lessor for providing concession to the lessee, it should be considered whether the same needs to be accounted for appropriately as per AS 19. Whether any assistance received from government are government grants under AS 12.

Revenue

Due to COVID-19, there could be likely increase in sales returns, decrease in volume discounts, higher price discounts etc. Under Ind AS 115, these factors need to be considered in estimating the amount of revenue to recognised, i.e., measurement of variable consideration.

Ind AS 115 also requires disclosure of information that allows users to understand the nature, amount, timing and uncertainty of cash ?ows arising from revenue. Therefore, entities may have to consider disclosure about the impact of COVID-19 on entities revenue

Enes to whom AS is applicable, may have postponed recognition of revenue due to signi?cant uncertainty of collection in view of the impact of COVID-19. AS 9, Revenue Recognition requires entities to disclose the circumstances in which revenue recognition has been postponed pending the resolution of signi?cant uncertainties.

Going Concern Assessment

Entities to whom Ind AS is applicable

Ind AS 1 Presentation of Financial Statements| Ind AS 10 Events after the Reporting Period

The Financial statements are normally prepared on the assumption that an entitiy is a going concern and will continue in operation for the foreseeable future. In assessing whether the going concern assumption is appropriate, management considers all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period.

Management of the entity should assess the impact of COVID-19 and the measures taken on its ability to continue as a going concern. The impact of COVID 19 after the reporting date should also be considered and if, management after the reporting date either intends to liquidate the entity or to cease trading, or has No realistic alternative but to do so, the ?nancial statements should not be prepared on going concern basis. Necessary disclosures as per Ind AS 1 shall also be made, such as material uncertainties that might cast signi?cant doubt upon an entity's ability to continue as a going concern.

Property Plant and Equipment (PPE)

Ind AS 16 and AS 10 require that useful life and residual life of PPE needs revision in annual basis. Due to COVID-19, PPE can remain under-utilised or not utilised for a period of me. It may be noted that the standards require depreciation charge even if the PPE remains idle. Further, COVID-19 impact may have a?ected the expected useful life and residual life of PPE.

The management may review the residual value and the useful life of an asset due to COVID-19 and, if expectations di?er from previous estimates, it is appropriate to account for the change(s) as an accounting estimate in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors and AS 5, Net Pro?t or Loss for the Period, Prior Period Items and Changes in Accounting Policies.

 Income Taxes

Entities to whom Ind AS is applicable: Ind AS 12 Income Taxes

COVID-19 could a?ect future pro?ts and/or may also reduce the amount of deferred tax liabilities and/or create additional deductible temporary di?erences due to various factors (e.g., asset impairment). Entities with deferred tax assets should reassess forecasted pro?ts and the recoverability of deferred tax assets in accordance with Ind AS 12, Income Taxes, considering the additional uncertainty arising from the COVID-19 and the steps being taken by the management to control it.

Management might also consider whether the impact of the COVID-19 a?ects its plans to distribute pro?ts from subsidiaries and whether it needs to reconsider the recognition of any deferred tax liability in connection with undistributed pro?ts. Management should disclose any signi?cant judgements and estimates made in assessing the recoverability of deferred tax assets, in accordance with Ind AS 1.

Provisions, Contingent Liabilities and Contingent Assets

Ind AS 37 requires a provision to be recognised only

where an entity has a present obligation

it is probable that an outflow of resources is required to settle the obligation; and

a reliable estimate can be made

Due to COVID-19, there is a need for exercising judgement in making provisions for losses and claims. A provision may be accounted for only to the extent that there is a present obligation for which the outflow of economic bene?ts is probable and can be reliably estimated

Ind AS 37 does not permit provisions for future operating costs or future business recovery costs. However, Ind AS 37 requires that an entity should disclose the nature of the obligation and the expected timing of the outflow of economic bene?ts.

Financial Instruments-Impairment Loss

Entities to whom Ind AS is applicable|Ind AS 109 Financial Instruments

Financial Instruments within the scope of Ind AS 109 such as Loans, Trade Receivables, Other Receivables, Investment in Debt instruments, Financial Guarantees and Loan Commitments not measured at fair value through pro?t or loss, Contract Assets and Lease Receivables are subject to impairment loss recognition and measurement based on an approach called Expected Credit Loss (ECL). This approach was introduced in the aftermath of the global ?nancial crisis of 2008 to strengthen the accounting recognition of loan-loss provisions by incorporating a broader range of credit information. ECL approach is expected to consider forward looking information and it is measured based on probability weighted amount that is determined by evaluating a range of possible outcomes. The widespread contraction in economic activity across the globe due to the rapid spread of COVID-19 is likely to have an impact on the quanti?cation of ECL and classi?cation of ?nancial assets into 3 buckets for recognition and measurement of impairment losses. In this context, following are important factors to be considered by the preparers. 

ECL requirement of Ind AS 109, the measurement of ECL is expected to consider current as well as forecasted macro-economic conditions and more than one scenario. Entities may need to develop one or more scenarios considering the potential impact of COVID-19.

In respect of Ind AS 107, Financial Instruments Disclosures, entities may need to disclose the impact of COVID-19 on various credit related aspects such as methods, assumptions and information used in estimating ECL, policies and procedures for valuing collaterals etc.

Entities to whom AS is applicable

In case of ?nancial assets such as Loans, Trade Receivables etc., entities shall be guided by the requirements of AS 4, Contingencies and Events Occurring Aer the Balance Sheet Date.

In respect of ?nancial assets within the scope of AS 13, Accounting for Investments, entities may have to carefully consider the requirements of making provisions for decline in the value of investments, which is other than temporary.

In respect of Banks and Insurance Entities, preparers need to consider impact of COVID-19 on classi?cation of Loans and Advances into Standard, Substandard, Doubtful and Loss categories in addition to the Prudential Regulatory requirements of RBI and The Insurance Regulatory and Development Authority of India (IRDAI).

Post Balance Events (Ind AS 10 and AS 4)

According to Ind AS 10, events occurring after the reporting period are categorised into two viz. (i) Adjusting events i.e. those require adjustments to the amounts recognised in its ?nancial statements for the reporting period and (ii)Non-adjusting events i.e. those do not require adjustments to the amounts recognised in its ?nancial statements for the reporting period. In certain cases, Management judgement may be required to categorise the events into one of the above categories

Similarly, in accordance with AS 4, Contingencies and Events Occurring Aer Balance Sheet Date, adjustments to assets and liabilities are required to be made for events occurring after the balance sheet date that provide additional information materially a?ecting the determination of the amounts relating to conditions existing at the balance sheet date

However, adjustments to assets and liabilities are not appropriate for events occurring after the balance sheet date, if such events do not relate to conditions existing at the balance sheet date. Disclosure should be made in the report of the approving authority of those events occurring after the balance sheet date that represent material changes and commitments a?ecting the ?nancial position of the enterprise.