Contents Covered in this E-Book • Non-performance of contractual obligations • Travel and tourism industry is being hit hard • Mitigating Factors • Auditor’s responsibility • Inventory physical verification • Going concern assumption • Other considerations • Conclusion

1. COVID 19:
Impact on Financial
Reporting
By Santosh Maller

2. By Santosh Maller
COVID 19:
Impact on Financial
Reporting

3. © Taxmann
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4. COVID 19: Impact on Financial Reporting
Non-performance of contractual obligations 02
Travel and tourism industry is being hit hard 02
Mitigating Factors 03
Auditor’s responsibility 03
Inventory physical verification 04
Going concern assumption 05
Other considerations 06
Conclusion 08
CONTENTS

5. With the world coming to a standstill, we are
facing the spiral effect of Covid-19 in the form of
economic uncertainty and financial strain. The
magnitude of disruption caused from the outbreak
has significantly impacted organizations of all sizes,
across all industries. There is an unprecedented level
of uncertainty about the economy, future earnings
and many other inputs that have started to pose the
challenges both operationally and financially.
Covid- 19 crisis and related economic uncertainty
presents a unique set of challenges for the companies
and auditors. The outbreak has affected different
businesses in different degrees; it is likely to have a
significant impact on businesses as a whole. There
could be a wide range of implications on financial
reportingthatshouldbeconsideredbythepreparersof
financial statements and the auditors for the purpose
of reporting in the short and medium term. These
challenges are liquidity crunch, resource constraints,
litigation on contractual defaults, accounting for
shut- down costs, asset impairment, insurance claims,
financial instruments, etc. Companies would have
COVID 19:
Impact on Financial
Reporting

6. to consider consequences of Covid-19 in context of
their financial reporting and auditors are expected to
put in extensive efforts while conducting the audits
in current and post Covid-19 environment.
NON-PERFORMANCE OF CONTRACTUAL
OBLIGATIONS
Ofparticularimportance,considerationsandeffortsof
managementmayrevolvearoundfinancialchallenges
that are being faced and their mitigating plans would
decide the future of entities. Many companies are
expected to incur significant penalties for terminating
contracts. Most parties to the commercial contracts
have initiated termination of contracts resulting in
heavy penalties. Even if parties have not agreed to
cancel/ terminate a contract, consideration is given to
issues related to loss of deposits, potential penalties,
provisions, contingent liabilities, etc.
TRAVEL AND TOURISM INDUSTRY IS BEING
HIT HARD
In wake of pandemic outbreak, few industries have
fallen as far and as fast as tourism. There can be
several instances of operating losses for industries like
Tourism and Hospitality which is heavily dependent
on travelling overseas. Taking a snapshot of tourism
industry amid Covid-19, it is expected to recognize
certain amount of operating losses as provisions in
financial statements for the current financial year i.e.
2019-20. The review has also indicated instances of
substantial losses that will incur during the financial
year i.e. 2020-21 for which no provision can be created
02
COVID 19: Impact on Financial Reporting

7. in current financial year itself in accordance with Ind
AS 37/ AS 29. However, future expected operating
losses may require certain assets of operation to be
tested for impairment under Ind AS 36/ AS 28.
MITIGATING FACTORS
With a view to mitigate the expected losses amid
economic uncertainties, it is possible that many
entities shall approach insurance companies to
mitigate the risk of potential business losses. But,
before recognizing any sum receivable on claim from
insurance companies, entity must examine whether
the insurance policy clearly covers the pandemic
situation or not. If yes, it should be recognized
only in case of virtual certainty otherwise, should
be considered as a contingent asset. Alongside,
companies may also seek for additional financing due
to fear of being classified as Non-Performing Asset
(NPA) by banks or may enter into agreements with
lenders to modify the terms of financial instruments.
Modification can be in terms of reduced interest
rates, payment terms and grace period for covenant
violations. Considering the overall impact, it may
cause an additional burden in terms of liquidity and
may require the entities to consider the requirements
of Ind AS 109 Financial Instruments for modification
of assets (for lenders) and liabilities (for borrowers).
AUDITOR’S RESPONSIBILITY
Independent Auditors play an important role in
the financial reporting process by providing an
independent opinion on financial statements. In
COVID 19: Impact on Financial Reporting
03

8. present scenario of limited mobility and access,
together with uncertain future, the considerations for
auditors are responding to the questions like going
concern assessment, physical inventory verification,
subsequent event considerations, etc.
INVENTORY PHYSICAL VERIFICATION
As noted, the nationwide lockdown situation has
impacted the management’s ability to conduct
physical inventory count at the year/ period end;
and auditors may not be able to attend the physical
inventory count. In this situation, the auditor should
consider the guidance as provided in SA 501 Audit
Evidence- specific considerations for selected items,
performing alternative audit procedures to obtain
sufficient and appropriate audit evidences regarding
existence and condition of the inventory.
The auditor may conduct the inventory count at
some alternate date say 15 July, 2020 with a roll-
back to the date of financial statements. It is equally
possible that with disrupted supply chains, entities
may require to adjust the carrying value of inventories
as per AS 2. Further, the fixed production overheads
pertaining to lock down period (ceased production
period/s) should be expensed off in the Statement
of profit and loss instead loading these overheads on
inventory. If inventories are under third party control,
the auditor should ask for confirmations and look
for inspections, if possible. If needed, appropriate
adjustments for possible shrinkage or damage of
inventory should be made.
COVID 19: Impact on Financial Reporting
04

9. GOING CONCERN ASSUMPTION
As a result of adverse impact of Covid-19 on the
companies,itisexpectedthatstressontheassessment
of going concern ability of company would be at the
highest. Auditors would be expecting more evidences
from the management to support its audit function
amid the difficult times. The management should
prepare forecast for the foreseeable future, but not
less than a period of 12 months. Also, feasibility of all
the on-going projects should be analyzed with future
action plans. Analysis of future cash flow projections
may prove to be a significant factor in considering the
future outcome with certainty. Some of the factors
which can be considered while assessing the going
concern assumption are:-
a) Whether the entity has the liquidity to continue
to meet its obligations as and when they fall
due.
b) Whether the entity has sufficient/ potential
borrowing facilities to meet its short term
needs.
c) Whether the future course of action plans is
feasible in current scenario.
d) Analyzing the extent of impact of Covid-19 on
covenants and commitments.
e) Any restructuring plans to ensure the solvency
which may crucially impact the working of
entity.
Looking the above factors, management should
prepare its financial statements so that a quality audit
function can be undertaken by the auditor. However,
if auditor disagrees with the basis of preparation of
COVID 19: Impact on Financial Reporting
05

10. financial statements, the auditor may include a para
in audit report to highlight the material uncertainty
related to going concern.
OTHER CONSIDERATIONS
Apart from above key highlighted areas, there are
numberofconsiderationswhichshouldbeconsidered
as of utmost importance by the companies and their
respective auditors for the current as well as coming
financial year. These includes:-
a) Internal Financial Controls over Financial
Reporting - Covid-19 may significantly
impact company’s internal control structure.
Companies due to unavoidable circumstances
would be reacting to the changes in different
ways depending on the type and severity
of change. The current situation triggered
the need of modifying the existing internal
controls, implementing new internal controls
due to isolation/ work from home/ illness, etc.
With the increased use of technology amid
pandemic due to work from home and due to
limited supervision both the auditors and entity
should remain alert to the possible instances of
unintentional and intentionally planned frauds.
b) Data Confidentiality and Cyber Security
– Due to lockdown, organizations have
adopted the policy of work from home but,
this involves an increased risk in itself. With
limited data connectivity, use of personal
hotspot connections and personal e-mail ids
has increased the risk of data confidentiality
along with cyber frauds. To mitigate the risk
COVID 19: Impact on Financial Reporting
06

11. COVID 19: Impact on Financial Reporting
factor, the organizations should issue written
detailed standard procedure to ensure that
the flow of information and work is happening
with minimized information technology risk.
c) Employee Benefits – Due to uncertainties amid
Covid- 19, entities may need to remeasure
the net defined benefit obligations/ assets as
per Ind AS 19/ AS 15. There may be an impact
on the fair value of the plan assets as well as
the discount rates used to present value the
defined benefit obligation due to significant
market fluctuations. During the periods of
mandatory lockdown, employees could be
required to use existing employee entitlements
– sick or annual leave entitlement. Therefore,
companies may need to consider the impact of
same on measurement of employee benefits.
Companies should update its estimates,
including its actuarial assumptions used to
measuretheemployeebenefits,asappropriate.
Also, an evaluation should be made whether
modifications to share- based arrangements
are non- beneficial or beneficial.
07

12. COVID 19: Impact on Financial Reporting
CONCLUSION
Coveringupthewhole,bothprofessionalaccountants
and management must remain focused on their
ethical responsibilities and on the public interest. It is
of vital importance for them to exercise heightened
diligence and professional judgment to combat the
higher risk of financial misrepresentation and fraud,
and to ensure government and other assistance
is used appropriately. It is the time to exercise the
professional judgment with due care to represent
the facts accurately and completely in all material
respects i.e. clearly describing the true picture of
business transactions in a timely and proper manner.
08

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