Impact of Covid–19 on Preparation of Financial Statements

Introduction

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 is a serious concern for many.  Financial statements need to account for such eventualities while reporting.  We have summarized the possible impact on the various aspects of financial statement in the below para.

Impact on various aspects of Financial Statements

1. Valuation of Inventory

Inventory is required to be valued and stated in the books of accounts as on 31^st March 2020. But since this year the lockdown was initiated from 23^rd of March due to pandemic, inventory should be diligently valued after taking into consideration the nature (Perishable or not) and life (goods with short expiry) of goods.  Entities must examine the need to write down the Inventories where they feel that net realizable value of inventory is lower than it’s cost price.

• Impairment of Assets

Value of assets such as Property, Plant and Machinery must be reconsidered. Considering the reduced economic activity in future and its impact on financial forecast & budgeted cash flows, management is required to re-evaluate the valuation of asset and must calculate the impairment loss (If any).

• Useful Life of Fixed Assets

During the lockdown period, maintenance of plant and machinery were at halt. Hence, management must consider if the same has affected in anyway the useful life of asset. And if there seems any change in useful life of such plant and machinery, then management must re-estimate the calculation of depreciation accordingly.

• Provision for Bad Debts

In the past, these pandemic-like situations are usually succeeded by a stressed  or depressed economy. Hence, management need to be proactive with their approach and must provide for the Provision for Bad debts if they are expecting a credit loss due to lower liquidity at the end of customers.

• Capitalization of borrowing cost

Construction projects have come to halt. Management must ensure that borrowing cost for such construction incurred during such period shall not form part of the cost of the project. And must be charged off as an expense.

• Going Concern Assumption

Management must reassess their use of going concern assumption if their business continuity has been affected due to this pandemic. Management must include appropriate explanatory note for its impact on the financial statement as on balance sheet date and may also explain it’s possible impact on the business operations in the next 12 months.

• Deferred Tax Assets

Management must reassess the calculation of deferred tax asset. And must see if the Deferred Tax Assets is realizable or not, and should make necessary required adjustment.

• Revenue Recognition

Management must reassess the revenue recognition policy adopted in the business for recognizing the income especially where there lies the uncertainty on receipt of Income or accrual of income. Especially in the cases where sales were done to the containment zone or the prohibited states and the goods were in transit at the year end.

• Disclosure in Financial Statement

Management must report any credit risks, liquidity risks, or any of the risk which could possibly have a significant impact on the financial position of entity.

Please Note: Due to these difficulties, Government has relaxed and extended due date for Audit as under

For Listed Entities, SEBI has deferred the timelines by 45 days to 30^th of June 2020

Tax Audit Due date extended from 30^th of September 2020 to 31^st of October 2020

Transfer Pricing Audit is extended from 31^st of October 2020 to 30^th of November 2020

You may read about ” Reporting by Auditor under Covid-19 Environment” below:-

Reporting by Auditor under Covid–19 Environment

Source Info: https://www.icai.org/