Financial Reporting Challenges and Implications from Covid-19
The coronavirus (COVID-19) pandemic has presented unforeseen and risky challenges for all organizations across the world. The lockdowns and measures taken worldwide to slow down the spread of the deadly virus have affected both the supply-side and demand-side of goods and services. Economic recovery is challenged and the long-term impact of the crisis remains uncertain and difficult to predict as we enter a second wave. Consequently, this uncertainty may have enormous implications for financial reporting for most organizations.
Therefore, it is essential to understand how the pandemic has affected your financial reporting responsibilities and how it can be managed. There will be multiple financial reporting implications to be considered by preparers of financial statements to report in the short and long term. The implications include asset impairment, revenue recognition, penalties, debt restructuring and compensations.
Re consideration on expected credit losses and future cash flow projections used in impairment testing is vital due to the outbreak of COVID-19. Many companies have experienced an economic loss because of this pandemic. These incurred and expected credit losses need to be examined to determine the impact on impairment assessments. Inventory, goodwill, intangible assets, property, plant & equipment, financial assets and investments will all need to be assessed for impairment losses. Management teams that perform impairment testing in-house may find this requirement a challenging task to be added to their role when management’s full attention on operations is crucial. This is also an area that will likely be subject to particular scrutiny and challenge by external auditors.
Revenue to be recognized as COVID-19 may have impacted the pattern of revenue recognition; entities may have to account for returns and refunds, for example, some schools and colleges may have to provide tuition refunds for cancelled classes and event management companies for cancelled events. For long term projects, contracts may need to be amended or modified to cater for the delays in rendering services.
Conferences and events cancelled, resulting in loss of deposits and or penalties for terminating contracts, will need to be appropriately recognized, measured, presented and disclosed in financial statements. It is therefore crucial that organizations review their arrangements for termination and force majeure clauses.
Governments around the world introduced lockdown measures that have brought much of global economic activity to a halt. Many businesses were forced to reduce their operations or shut down resulting in cash inflows decline and as such sought additional financing, revision of repayment terms and interest rates of existing debt agreements and or request waivers if they were no longer capable of servicing debt covenants. Such modifications may impact the classification and measurement of financial liabilities presented on the balance sheet.
Entities with business disruption insurance may be entitled to a certain amount of proceeds to cover some or all their losses. Besides, there have been and will likely be more government grants/incentives available to help support businesses which will have financial recognition and disclosure implications.
Going concern situations
While assessing the entity’s ability to continue as a going concern, management must consider events after the date of the financial statements. After assessing, all the available information and situation, the entity will consider whether there is material uncertainty which raises significant doubt about their ability to continue as a going concern.
HLB HAMT can help you manage the financial reporting implications for your company resulting from COVID-19 ;
- Through our dedicated valuation experts
- By helping in development of a framework for effective financial crisis management and contingency planning
- Through our business consultants who can assist in debt restructuring and renegotiating debt agreements
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