Covid- 19 Financial Reporting Implication

Individual Assignment
 Covid- 19 Financial Reporting Implication

What We Know about the Covid 19?

The Corona Virus (Covid19) pandemic has created the most far-reaching global pandemic with
the huge impact to the human life, societies & economics for a long period of time. The world
health organization has declared the Covid 19 to be a pandemic in year 2020. Covid 19 has
become another series of pandemic over the past century. Moreover, many governments have
taken action for control the spread of Covid 19 resulted in shut down of business & society led to
major economic impact including unemployment, business closures, government budget deficit
& national gross product impact in world wide. Similarly, many countries have experienced
their biggest ever recession & economic uncertainty. Individuals, all types of consumers & all
business of all sizes have been affected during year 2020 to the present. Further, as a result of
vaccination covid 19 has controlled for a certain level.

The Covid 19 pandemic may finally be ending?

Different variant of Covid 19 has spread world wide in time to time. a new variant may yet
higher another chapter in covid 19 & pandemic phase looks to be ending (MC Kinsey &
Company 2022). However, uncertainty of future still reaming as same for the individual,
business & as well as economy. Further post impact of Covid 19 world economy & Sri Lankan
economy regime effects in present scenario.

Impact on Covid 19 on Financial Reporting

As result of covid 19 pandemic organization after experiencing the disruptions of business

activities this includes but is not limited liquidity concerns, increasing inventory levels,
reductions of production, decreased demand, discretionary spending, layoffs, idling of assets &
other resecuring activities. The continuation of these circumstances could result in negative
impact on entity financial results.

So covid 19 pandemic has created a situation that investors & other stake holders need high
quality financial information more than ever. How ever information must be reliable & relevant
to understand of the financial position or performance of the company should be appropriately
disclosed. For that organization have to follow the accounting & financial reporting
requirement that will need to be considered in addressing the financial effects of Covid 19 when
preparing financial statements.

Preparing financial statements is likely to involve more than the usual update since the last
annual financial statements. Investors and other users may expect information above and beyond
what is typically disclosed. • Generally, items are required to be recognized and measured as if
the interim period were a discrete stand-alone period. Whether they are relevant depends on the
company’s specific circumstances – i.e., the nature and extent of COVID-19 impacts on the
financial position, performance and cash flows of the company
Explore the Key Considerations

Material Judgment & Uncertainties

Organization should consider all available information for the estimates developing and apply
consistent assumptions for relevant assessment. Appropriate disclosures requirement should be
made for significant judgement & disclosure must reflect the conditions at reporting date. In the
past relatively simple disclosures had made as relatively little judgement or estimation may have
been involved. So more detailed disclosures which provide material judgment & reflect the
uncertainties is need in financial statements where material uncertainties exist. However, going
concern basis appropriate and financial statements are prepared in accordance with the applicable
reporting framework but with the enhanced disclosures.

Events after reporting date

 events result in covid-19 extremely uncertain and volatile. so, entities need to evaluate whether
the consequences of covid-19 represent subsequent events that need adjustments of disclosures in
the financial statement at the report in date. entities are required to consider conditions as they
existed at the reporting date when evaluating subsequent events include in expected credit loss
receivables Inventory of obsolesces, impairment analysis and other factors. However, the events
due to the coronavirus conditions including business implication and effect is likely to be
incorporated into the financial statements as an adjusting event supported by adequate
disclosures for the reporting period ending thereafter

Going Concern and Disclosures of Financial Statement

 Most of the entities adversely affected by the coronavirus that need to consider Going Concern
issues for some business entities. Accordingly, entities should consider several possible
sensitivity analyses to determine whether there is any material uncertainty. IAS 1 presentation of
financial statements required management assess company ability to continue as Going Concern.
Going Concern assessment needs to be e performed up to the date on which financial statements
are issued.  So Going Concern assessment relates to at least the first 12 months after the balance
sheet date. if there is any significant doubt on the company's ability to operate under the Going
Concern basis due to the material uncertainty need to be discoursed   in the financial statement.
Management should analysis the current situation and identifying the risk associated with the
major business sector in their entities include in government restriction, economic situation,
source of replacement financing other factors.

Disclosures should include the significant assumptions and judgment applied in making the
Going Concern assessment. Assessment should include different assumptions which can be
updated to take into account the change in nature of uncertainty. However, with considering the
material uncertainty management are of the view that Going Concern basis is appropriate
financial statement prepared on a Going Concern basis for that management need to understand
dip and honest assessment and ensure to include good quality disclosure around Going Concern
which are clear and material. Furthermore, these disclosures Should state the duration of the
future of period over which Going Concern assessment has been made. in particular the current
potential cash resources include in access to access to existing and New Finance in facilities and
factoring & revers factoring arrangement need to be considered up to date of the authorization of
the financial statements.
Management’s going concern assessment may be significantly affected by the current
circumstances. The considerations that apply for the going concern assessment when preparing
annual financial statements also apply for interim financial statements. When assessing the
uncertainties associated with a company’s going concern assumption, management takes into
account all available information for a period of at least 12 months from the date of the interim
financial statements. For example, when a company with a calendar year end prepares its
quarterly interim financial statements at 31 March 2020, it considers information for the period
until, but not limited to, 31 March 2021 when assessing whether the going concern assumption is
appropriate. If there is a material uncertainty about the company’s ability to continue as a going
concern at the date on which the interim financial statements are authorized for issue, then that
uncertainty is disclosed in those interim financial statements. This is the case irrespective of
whether it was disclosed in the most recent annual financial statements. In addition, disclosure is
required when management concludes that there are no material uncertainties but reaching that
conclusion involved significant judgement.

Fair Value Measurement

A change in the fair value measurement affects the disclosure required by IFRS 13 which
requires companies to disclose the valuation techniques. It will be useful to stake holders to
understand the whether Covid19 has been considered for the purpose of Fair Value
Measurement. Entities should consider what conditions & assumptions are going to include at
the reporting date. For fair value measurement, particularly of financial instrument & investment
property will need to be reviewed to ensure the value reflects the conditions at the balance sheet
date. At the reporting date using all available information assumptions have to be made
considering due diligence efforts. Due to the Covid 19 situation market price has increased of
many assets and volatility of prices on various market has also increased. This directly affected
to fair value measurement. For example, if a valuation technique is based on inputs that are
derived from volatile market. Consequently, special attention should pay on the commodity
prices forecasting that’s used in developing fair value conclusion.

Impairment Test

Reviews for indicators of impairment and any resulting tests for impairment of non-financial
assets are performed at the interim reporting date in the same manner as at the annual reporting
date. Companies may have tested their goodwill and intangible assets for impairment under
LKAS 36 Impairment of Assets when preparing their latest annual financial statements.
However, given the current economic circumstances, there may well be indicators of impairment
at the interim reporting date that trigger testing of these assets again for impairment. If a
company recognizes a material impairment loss on non-financial assets, then it provides in its
interim financial statements an explanation of and an update to the relevant information included
in the last annual financial statements. LKAS 36 provides relevant disclosures to be considered
in this regard. Entities should need to assess the impact of Covid 19 on asset impairment. If there
is significant economic impact due to Covid 19 on assets impairment test should be done for
assets & assets group. Estimates of future cash flow & earnings are likely to be significantly
affected by direct or indirect impact. It will lead to reduction of differed tax liability & create
additional deductibles. Continuous identification, evaluation & revaluation are essential to
understand the extent of the need for recognition & foe what periods.

Management should consider whether

 COVID-19 and the measures taken to control it are likely to reduce future cash inflows or
increase operating and other costs.
 An indicator of impairment requiring that goodwill and indefinite lived intangible assets
are tested outside of the annual cycle or that other assets are tested.
 The assumptions and cash flow forecasts used to test for impairment should be updated to
reflect the potential impact of COVID-19
 budgets, forecasts and other assumptions from an earlier impairment testing date that
were used to determine the recoverable amount of an asset should be revised to reflect the
economic conditions at the balance sheet date, specifically to address increased risk and
uncertainty.

Valuation of Inventories

The Covid 19 pandemic may affect the value of the inventories under IAS 2, in some cases
inventories are subject to expiration results in write down for obsolesces. On the other hand,
entities should require to assess future estimating selling price which may require a write down
in the cost of inventory in an interim or annual periods. Under IAS 2 inventories are measured at
the lower of their cost & net realizable value. In Covid 19 situation the NRV calculations may be
more challenging & required more detailed methods & assumptions.

With the Covid 19 pandemic impact valuation of inventories under IAS 2, NRV calculation is
required more details methods and assumptions. Interim Inventory impairment losses should be
reflected in the interim period in which they occur with subsequent recoveries recognized as
gains in future period.

LKAS 2 Inventories requires a company to measure its inventory at the lower of cost or net
realizable value and update its estimate of the net realizable value at the interim reporting date.
The COVID-19 outbreak may affect this estimate. Write-down losses: If a company writes
inventory down to its net realizable value at the interim reporting date, then any resulting losses
need to be recognized immediately – i.e., they cannot be deferred because they are expected to
be restored or absorbed by the annual reporting date. Companies need to disclose the write-down
of inventories to net realizable value and their reversa

Revenue Recognition

Due to business disruption associated with the Covid 19 affect to entities to entering into
customer agreements by using its normal business practices which may make the determination
of whether it has enforceable rights and obligations challenging. In addition, because many of its
customers are experiencing financial difficulties and liquidity issues, an entity may need to
develop additional procedures to properly assess the collect ability of its customer arrangements
and consider changes in estimates related to variable consideration. An entity’s sales and revenue
might decline as a result of the reduced economic activity due to Covid 19 and entities should
account for when it happens. However, there could also be an effect on the assumptions made by
management in measuring the revenue from goods or services already delivered and in particular
on the measurement of variable consideration. All of these could affect the measurement of
variable consideration. IFRS 15 Revenue from contracts with customers requires that variable
consideration is recognized only when it is highly probable that amounts recognized will not be
reversed when the uncertainty is resolved. Management should reconsider both its estimate of
variable consideration and whether the recognition threshold is met.

Remeasurement of net defined benefit obligations/assets: Companies preparing interim financial

statements should consider whether net defined benefit obligations/assets need to be remeasured.
Under LKAS 19 Employee Benefits, remeasurements are recognized in the period when they
arise; therefore, if adjustments at the interim reporting date are considered to be material, then
they need to be recorded at that date. Actuarial valuations: An updated measurement of plan
assets and obligations is required when a plan amendment, curtailment or settlement is
recognized. In addition, significant market fluctuations may trigger the need for an updated
actuarial valuation.

Statement of Profit or Loss

The impact of COVID-19 may give rise to material expense or income items for many entities,
which require separate disclosures. Examples of such items include restructuring provisions and
impairment losses related to non-financial assets. Even though the entities were able to manage
their general and admin cost, they had to face new costs which were occurred due to pandemics.
Such as the additional cost of IT equipment for work from staff, cost derived through legal and
other mandatory procedures, and continues fogging and cleaning activities.

Cash Flow Statements

From a cash flows perspective, due to lower operations, the company has faced difficulties in
making the payment of employees’ salaries, rents, supplier payments, and bank loans. Investing
additional capital requirements, deferment of staff salaries, revising the customer credit terms,
and negotiation with banks to extend the credit facilities are some of the key concerns to
concentrate.

Leasing

Under the leasing arrangement entities should consider what they needs to do if existing lease
agreements or agreed lease payment have been changed due to Covid 19. For that entities should
carefully analyzing the existing lease agreement or and lease payment in order to assess their
accounting consequences. There are no specific guidance on accounting for changes in lease
payments. It depend on the classification the lease as either operating lease or finance lease & it
depend on policy chosen.

 For lease agreement, acceptable accounting policies includes,

 Recognizing all leases on balance sheet
 Recognizing finance leases on balance sheet & keeping operating leases off balance sheet
 Keeping all leases off balance sheet
 Interim financial Statements
Short term plan for improving the quality and reliability of financial reporting

The organization was incorporated to run the business for the foreseeable future. The micro and
macro environmental factors impact the smooth running of the business. The shareholders are
acute on receiving a return on investment made by them. Unusual challenges impacting the
organization’s intention to increase shareholder’s wealth should be addressed and the
organization should plan for adapting any changes to encounter any future challenges.

Organizations should adopt new ways of overcoming these challenges to meet customer
expectations. It should be able to practice.

 Ability to sustain financial stability in both the short and long run.
 Human resource management
 Ability to access broader business information.
 Crisis management techniques

Companies have been affected due to global economic crises in the past and crisis management
is not a new thing for the management to worry about. Financial stability is a vital thing for a
company’s especially to have a steady working capital cash flow for management to cover the
company’s short-term fixed and variable costs to maintain uninterrupted operations of the
organization. An annual forecasted cash flow and Capex budget should be prepared and
overviewed by the management. The respective managers should keep informed about the
funding situation and how it should be managed by the staff.

The organization should be aware of the internal and external factors affecting the business
operation to defend them from potential challenges. Knowing key information will give a
competitive advantage over the rivals. The top management should derive access to significant
data i.e.: key political decisions, forecasted seasonal impact, legislative changes, fiscal and
monitory policy impact over the business, and other non-financial data by subscribing to
regulatory bodies and keeping close monitoring over their action towards businesses. This
practice by management will allow them to respond quickly to unexpected situations than the
rivals. Adapting the strategic moves mentioned above will allow the business to sustain itself in
the market for a longer run.

Recommendation

 Assess the company’s ability to continue as a going concern at the reporting date.
 Consider whether information disclosed in the last annual financial statements remains
relevant. If not, then provide updated disclosures.
 Assess and reflect the impacts of the COVID-19 outbreak in the financial statements – in
particular, whether uncertainties are factored into all the necessary estimates and
judgements.
 Assess whether the disclosures and explanations provided in the financial statements are
sufficient for users to understand the significant events and transactions that have
occurred since the annual reporting date.
 Focus on alternative method for inventory counting and fixed assets verification.
 Provide additional disclosures to enable users of financial statements to understand the
overall impact of the COVID-19 outbreak on the financial position and performance of
the company
 Follow the guide line issued by the International Accounting Standard committee and
other regulation bodies.