Coverage of the Webinar 1. COVID-19: PANDEMIC AND THE RIPPLE EFFECT A. Unprecedented Human, Economic and Financial Crisis facing the world with widespread disruption B. Due to the significant downturn in the economic activities and the long term impact of the same, the RBI, as well as leading credit rating agencies (Moody, S&P, Fitch, and CRISIL), have predicted a shrinkage of the GDP during FY 2020-21 of 2%-5% and all-time high unemployment. 2. FINANCIAL CHALLENGES & MITIGATING PLANS A. An entity engaged in tourism and hospitality is heavily dependent upon the tourists from India traveling overseas and foreign nationals visiting India. In the light of COVID-19 outbreak across the globe, the entity has analyzed the likely impact of customers' behavior coupled with bleak employment scenario on its revenue over the next year. B. This review has indicated possible substantial operating losses during the next financial year i.e. 2020-21. C. The entity is exploring the possibility of recognizing a certain amount of operating losses as the provision in the financial statements of the current year itself i.e. 2019-20. 3.AUDITING CHALLENGES A. COVID -19 caused unprecedented situations in the businesses and the environment. Changes at such a large scale impacted each industry. B. Albeit auditors faced many difficulties in auditing areas of financial statements, challenges faced while auditing inventory has been taken as an example and discussed in the following slides. 4. IMPACT ON FINANCIAL REPORTING A. Updated financial forecasts for the foreseeable future, but not less than a 12-month period; B. Updated sensitivity analysis; C. Forecasted compliance, or lack thereof, with banking and other covenants for the foreseeable future; and D. Any other information available up to the date the financial statements are authorized for issuance. 5. OTHER KEY CONSIDERATIONS A. Employee Benefits B. Internal Financial Control over Financial Reporting C. Data Confidentiality and Cyber Security

1. COVID 19:
IMPACT ON FINANCIAL
REPORTING
(27 June 2020 | CA Santosh Maller)

2. 01
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02

4. 03
AGENDA FOR WEBINAR
COVERAGE04
Financial
Challenges
& Mitigation
06
Impact on
Financial
Reporting
17
Other Key
Considerations24
Auditing
Challenges
& Solutions
11

5. 01. COVID-19

6. COVID-19 PANDEMIC AND THE RIPPLE EFFECT
05
Unprecedented Human, Economic and Financial Crisis facing the world with widespread disruption
Due to significant downturn in the economic activities and the long term impact of the same, the RBI as
well as leading credit rating agencies (Moody, S&P, Fitch and CRISIL) have predicted a shrinkage of the
GDP during FY 2020-21 of 2%-5% and an all-time high unemployment.
COVID 19 has and will continue to have far reaching implications on financial reporting as well as on
audit function. Key Impact areas include:
Asset Impairment
Inventory
Revenue
Going Concern
Financial Instruments
Debt covenants and debt servicing
Litigation on contractual defaults
Presentation as ‘exceptional’ items
Accounting for shut-down costs
Insurance claims
Onerous contracts
Foreign exchange differences

7. 02. FINANCIAL CHALLENGES &
MITIGATING PLANS

8. 07
Companies may incur significant penalties for terminating contracts.
For example, many conferences and events are being cancelled, which can result in loss of deposits and/or
require penalties to be paid.
These non-recurring costs will need to be appropriately recognized, measured, presented, and disclosed in
financial statements.
Even when an entity has not made a decision to cancel an event, consideration will have to be given to the
issues related to deposits and potential penalties if the event cancellation is probable in the future.
It’s important that the contracts are reviewed for termination and force majeure clauses.
Such assessment needs to be especially done as per AS 29/ Ind AS 37 for all executory agreements that are
likely to become onerous.
CONTRACT TERMINATION PENALTIES

9. 08
An entity engaged in tourism and hospitality is heavily dependent upon the tourists from India travelling overseas
and foreign nationals visiting India. In the light of COVID-19 outbreak across the globe, the entity has analysed the
likely impact of customers behaviour coupled with bleak employment scenario on its revenue over the next one year.
This review has indicated possible substantial operating losses during the next financial year i.e. 2020-21.
The entity is exploring the possibility of recognising certain amount of operating losses as provision in the financial
statements of the current year itself i.e. 2019-20.
Is this accounting permitted?
EXAMPLE: OPERATING LOSSES
In the light of COVID-19 outbreak across the globe, after the review expected that there might be possible
substantial operating losses during the next financial year i.e. 2020-21.
In this scenario, for losses expected in the next financial year, entity cannot create provisions for operating losses
in the current financial year itself in accordance with Ind AS 37/ AS 29
However, an expectation of future operating losses might be an indication that certain assets of the operation
may be impaired and an entity tests these assets for impairment under Ind AS 36/ AS 28.

10. 09
A reputed event and conference management company had obtained loss of profits insurance cover to mitigate the
risk of potential business losses due to circumstances beyond its control.
During the current accounting year, it has estimated a loss of profit of certain amount and initiated its discussion with
the insurance company for reimbursement of the loss.
The entity is confident that the insurance company will admit and honour its claims for loss of profits.
Accordingly, the entity is considering recognising an asset for this insurance claim recovery.
Is this accounting permitted?
EXAMPLE: REIMBURSEMENT RIGHTS
The entity, before it can recognise a receivable for the claim on insurance company for business interruption or popularly
called Loss of Profit Insurance, must examine whether the insurance policy clearly covers pandemic situation.
The entity should recognise loss of profit recovery as an asset only if it is virtually certain, i.e. the insurance entity has
accepted the claims and the insurance entity will meet its obligations. Otherwise, it will be considered as a contingent asset.
Ind AS 37/AS 29 contain certain specific provisions regarding the accounting for reimbursements from a third party for
some or all of the expenditure required to settle a provision. However, these provisions are not relevant in the instant case.

11. 10
Companies in financial difficulties may seek additional financing, relief from being classified as non-
performing asset (NPA), revise repayment terms and interest rates of existing debt agreements, or request
waivers if they no longer satisfy debt covenants.
The consequential impact any non- compliance with debt covenants need to be appropriately dealt with in
the financial statements.
Lenders and borrowers both may enter into agreements to modify the terms of financial instruments such
as bank loans.
These modifications may take the form of reduced interest rates, modification to payment terms and ‘grace
periods’ for covenant violations.
Entities should consider the requirements of Ind AS 109 for the modification of assets (for lenders) and
liabilities (for borrowers). These modifications may give rise to gains for borrowers and losses for lenders.
MITIGATING FACTORS

12. 03. AUDITING CHALLENGES

13. AUDITING CHALLENGES
Covid -19 caused unprecedented situations
in the businesses and environment.
Changes at such a large scale impacted
each industry.
Albeit auditors faced many difficulties in
auditing areas of financial statements,
challenges faced while auditing inventory
has been taken as an example and
discussed in the following slides.
12

14. 13
Due to the travel restrictions and lockdowns/curfews, the management may not be able to fully or partially carry
out annual inventory count around the year-end.
INVENTORY: PHYSICAL VERIFICATION
Appropriate roll-back procedures: Example:
Actual inventory count/ stock take may be 15 July 2020. Separate information pertaining any purchases/sales
after 31 March 2020 needs to be kept. With today’s technology, the inventory software should be able to
manage this.
Once the company has properly segregated this, it will need to take a look at any invoices received and sent
after 31 March 2020. During this part of the process, you may also want to double-check your segregated
inventory to make sure everything that has been set aside was received after that date. Once the stock is
counted as at 15 July 2020, carry out a roll back procedure in order to derive the implied stock level as at
31 March 2020. Cross check and reconcile with the inventory level as per the client’s inventory software.
Appropriate adjustments to be made for possible shrinkage or damage of inventory.
Possible Approach:

15. 14
Reliance Industries Limited: Extracts from Financial Results for Year Ended 31 March 2020
The Company has determined the non-cash inventory holding losses in the energy businesses due to dramatic drop
in oil prices accompanied with unprecedented demand destruction due to Covid-19 and the same has been
disclosed as Exceptional Items in the Financial Results. Impact of the same, net of current tax for the quarter and
year ended 31 March 2020 is Rs. 4,245 crore (tax Rs. 899 crore).
SKF Limited: Extracts from Financial Results for Year Ended 31 March 2020
Management has performed the annual 'wall to wall' inventory verification at each of its location as at December
31, 2019 (attended by the auditors) and performed roll - forward procedures for the period January 1, 2020 to
March 31, 2020.
Management believes that it has taken into account all the possible impact of known events arising from COVID 19
pandemic in the preparation of the financial statements. However, the estimated impact of global health pandemic
might vary from the date of approval of these financial statements and the Company will continue to monitor any
material changes to future economic conditions.
INVENTORY: PHYSICAL VERIFICATION-REAL LIFE EXAMPLE

16. 15
Piramal Enterprises Limited: Emphasis of Matter
Due to the COVID-19 related lockdown, we were unable to observe the Management's year-end physical verification of
inventory at certain locations of the Parent in India, amounting to Rs. 217.12 crores (Total Inventory Rs. 423.56 crores). We
have performed alternate procedures to audit the existence of inventory as per the guidance provided in SA 501 "Audit
Evidence - Specific Considerations for Selected Items", which includes inspection of supporting documentation relating to
purchases, production, sales, results of cyclical count performed by the Management through the year and such other third
party evidences where applicable, and have obtained sufficient appropriate audit evidence to issue our unmodified opinion
on these Consolidated Financial Results. Our report is not modified in respect of this matter.
The Dharamsi Morarji Chemicals Limited: Emphasis of Matter
We draw your attention to Note 4 to the financial results which explain the uncertainties and the management's
assessment of the financial impact due to the lock-downs and other restrictions and conditions related to the COVtD-19
pandemic situation, for which a definitive assessment of the impact in the subsequent period is highly dependent upon
circumstances as they evolve. Further, our attendance at the physical inventory verification done by the management was
impracticable under the current lock-down restrictions imposed by the government and we have therefore, relied on the
related alternative audit procedures to obtain comfort over the existence and condition of inventory at year end.
INVENTORY: PHYSICAL VERIFICATION-REAL LIFE EXAMPLES

17. 16
Inventory write-down to net realisable value may be necessary due to reduced movement in inventory/
lower commodity prices/inventory obsolescence due to lower than expected sales price.
Ind AS 2 and AS 2 require that fixed production overheads are included in the cost of inventory based on
normal production capacity. Reduced production might affect the extent to which overheads can be
included in the cost of inventory.
If an entity ceases production or significantly reduces production for a period of time, significant portions of
fixed production overheads (e.g. rent, depreciation of assets, some fixed labour, etc.) will need to be
expensed in P&L rather than loading these overhead on the inventory.
INVENTORY: VALUATION & WRITE-DOWN

18. 04. IMPACT ON
FINANCIAL REPORTING

19. GOING CONCERN ASSUMPTION
18
Impact of COVID-19 (i.e., whether it has materially impacted or is it expected to materially impact)
on the auditor’s evaluation of management’s assessment of going concern.
COVID-19 affected companies will need to look at the following in assessing going concern:
Updated financial forecasts for the foreseeable future, but not less than a 12-month period;
Updated sensitivity analysis;
Forecasted compliance, or lack thereof, with banking and other covenants for the foreseeable future; and
Any other information available up to the date the financial statements are authorized for issuance.
Auditor’s Considerations
Reconsideration of the appropriateness of the use of the going concern basis for the preparation of
the financial statements, or consequential modification to the auditor’s report as needed.

20. GOING CONCERN ASSUMPTION
19
Some factors to be considered while assessing Going Concern Assumption
Impact on the economy and asset prices in general.
Impact of various measures taken by RBI for improving liquidity, government assistance
including economic package
Whether the entity is operating in a highly impacted sector
Whether the entity has the liquidity to continue to meet its obligations as they fall due
Whether the entity has sufficient existing/ potential borrowing facilities to meet its short-term needs
Whether the entity has plans and ability to restructure their debt obligations if required to ensure solvency
Assessing the financial health of key customers/ vendors and their impact on entity’s operations
Impact of contractual covenants and commitments

21. GOING CONCERN: REAL-LIFE EXAMPLE
20
Lemon Tree Hotels Limited: Extracts from Financial Results 31 March 2020

22. GOING CONCERN: REAL-LIFE EXAMPLE
21
Lemon Tree Hotels Limited: Extracts from Auditors Report 31 March 2020

23. GOING CONCERN: REAL-LIFE EXAMPLE
22
InterGlobe Aviation Limited: Extracts from Financial Results 31 March 2020

24. GOING CONCERN: REAL-LIFE EXAMPLE
23
InterGlobe Aviation Limited: Extracts from Auditors Report 31 March 2020
Emphasis of Matter
We draw attention to Note l 6 to the standalone financial results, which describes the possible
effects of uncertainties relating to COVID-19 pandemic on the Company's operations and
results as assessed by the management Our opinion is not modified in respect of this matter.

25. 05. OTHER KEY CONSIDERATIONS

26. EMPLOYEE BENEFITS
25
Under both Ind AS 19 and AS 15 defined benefit obligations are recognized in balance sheet equal to net of:
Present value of defined benefit obligation
Fair value of the plan assets at the end of the reporting period.
Due to COVID 19, there may be an impact on the fair value of the plan assets as well as the discount rate used to
present value the defined benefit obligation.
Termination benefits are recognised at the earlier of (i) when the entity can no longer withdraw the offer; and (ii)
the entity recognises costs for a restructuring and involves payment of such benefits.
Adjustments to accumulated compensatory leave of employees; for determining employee’s leave obligation at
the BS date end, leave credits allowed/ leaved adjusted during lock down period, etc. also need to be considered
With changes required in valuations assumptions due to change in business forecasts/ projections, valuation of
existing employee stock option plans (ESOPs) and new ESOPs will need careful evaluation by entities and auditors.

27. INTERNAL FINANCIAL CONTROLS OVER FINANCIAL REPORTING
26
Due to the impact of COVID-19, there could be additional considerations that need to be taken care of:
Need to implement new internal controls or modify existing internal controls over financial reporting
Evaluate whether any of the controls is not operating effectively on account of absence of concerned
persondue to illness/quarantine/ working from home/isolation/travel inaccessibility.
Identify alternate controls.
Ability to close financial reporting process in time.
Due to COVID 19 with limited supervision, oversight, few board meetings, limited cyber security and internal
reporting; there are possibilities of unintentional override of designed controls or even of planned frauds.
Therefore, it is imperative that both auditors and entity should remain alert to any such indicators of override of
internal controls.
The auditors should gather sufficient and appropriate audit evidence before issuing their audit opinion.

28. DATA CONFIDENTIALITY AND CYBER SECURITY
25
With limited connectivity, data transfer taking place using personal hotspots internet connections and
use of personal e- mail ids by employees and other stakeholders, there is an increased risk of
compromising on data confidentiality and cyber security.
Organisations should issue written detailed standard procedures to all to ensure that flow of
information and work is happening with minimised information technology risks.

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