University of Dhaka

Department of Accounting and Information Systems

BBA Program

25th Batch, Section: A

Course: ADVANCED FINANCIAL ACCOUNTING I (2101)

An Assignment on
POTENTIAL IMPACTS OF COVID-19 ON FINANCIAL REPORTING

Prepared by

Bablu Nasir

Roll: 25-001

Section: A

Submission to

Dr. Md. Jamil Sharif, ACMA

Assistant Professor
Department of Accounting and Information Systems

Date: 06 August 2020

Table of Contents

Introduction .............................................................................................................. 2
LO1 How Financial Reporting Will Be Impacted .................................................... 3
1.1 Impairment of Assets ...................................................................................... 3
1.2 Write-Down of Inventories .............................................................................. 4
1.3 Interest Rates .................................................................................................. 4
1.4 Currency Exchange Rates ............................................................................... 5
1.5 Modification of Predetermined Business Contracts and Projects ............................ 6
1.6 Overall Potential Impacts upon Financial Reporting .................................... 7
LO2 The New Issues We Have to Consider in Reporting ....................................... 8
LO3 The Role of the Audit Committee..................................................................... 9
3.1 Risk Assessment.............................................................................................. 9
3.2 Inquiries with Management, Personnel and Auditors .................................. 9
3.3 Monitoring Information and Guidelines from SEC and Other Authorities 10
3.4 Internal and External Audit Oversight ....................................................... 10
LO4 Role of the Auditor .......................................................................................... 11
4.1 Professional Judgment and Skepticism ....................................................... 11
4.2 Events after the Reporting Period ................................................................ 11
4.3 Accurate and Effective Estimation ............................................................... 12
4.4 Evidence-Based Auditing .............................................................................. 12
4.5 Combating Challenges in Group Auditing ................................................... 12
Conclusion ............................................................................................................... 13
References ............................................................................................................... 14

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Introduction
The widespread prevalence of the Novel Coronavirus and its declaration as a pandemic has so
far, only negatively, impacted our lives and economies. A devastative downfall in businesses
and economies due to the coronavirus outbreak is obvious in our personal lives as well. As a
result, huge impacts of COVID19 also affect different issues related to financial reporting. One
thing for sure due to the pandemic—major changes will be introduced in financial reporting
fields, significantly differing from the conventions and aspects maintained earlier.

In this report, I present a brief study as to what impacts the coronavirus will cause in the
financial reporting field. Therefore, I summarize my study in four parts—namely: (1) how
financial reporting will be affected; (2) newer considerable issues in financial reporting; (3)
role of the audit committee; and (4) role of the auditor—to address these changes. My research
and findings, though theoretically generic, are predominantly based on conditions and aspects
of Bangladeshi economy.

One very common conclusion can already be drawn that, in future, financial reporting will be
dependent, more than ever, on different technological aspects. However, financial reporting is
such a unique field that cannot be completely independent of the application of human thoughts
and observations. The reason? Undoubtedly, human judgments, an integral part of financial
reporting, can never be replaced with artificially developed technological superiority.

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LO1 How Financial Reporting Will Be Impacted
Financial reporting is often subject to consideration and contemplation when changes in
business activities and its environment take place. For instance, if the regulatory authority
issues orders for all companies to shift to, and maintain, a uniform reporting period, i.e., from
April to March, companies maintaining a different financial reporting period must adjust to the
new conditions. This affects financial reporting in many respects such as, corporate tax
calculation, calculation of depreciation and amortization etc.

Similarly, since COVID19 is a global pandemic affecting almost all business sectors and
industries, its impacts on financial reporting are substantial. As expected, economic conditions
of some industries highly benefited from increased demand of products, due to the COVID19.
On one hand industries like direct service, transportation, fast food, tourism have faced severe
downfalls; conversely, telecommunications, pharmaceuticals, electronics etc. industries
enjoyed healthy growth as a result of increased product demand.

1.1 Impairment of Assets

Preparers of financial statements might need to pay special attention on the
nonfinancial assets for measuring their fair values at the reporting date, in order
to find whether any asset has been impaired. Chances are great that assets for
companies in the depressed industries will be impaired significantly. The
expected future cash flows affected by the pandemic will vary from the cash
flows that had the pandemic not affected. Therefore, reduced expected future
cash flows negatively impact the future usefulness of those assets which in turn
diminishes the present value of those nonfinancial assets, causing their
impairment.

Therefore, financial statements preparers must carefully conduct impairment

tests while valuing the assets to properly reflect, and faithfully represent, the
actual picture of nonfinancial assets affected by the COVID19.

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1.2 Write-Down of Inventories
Accountants apply LCNRV (Lower of Cost and Net Realizable Value) concept
as the usual basis for reporting inventories. LCNRV concept states that
inventories be measured at the lesser of the cost and the net realizable value of
inventories. Though cost remains constant, net realizable value of inventories
changes in the course of time, getting affected by various factors. Currently, one
such most alarming factor is the reduced or halted production caused by
COVID19. Therefore, inventories remain unused and their fair value gradually
decreases. As a result, companies must write-down the cost of the inventories
reduced because of the pandemic.

Challenges in reporting may arise as it might be difficult to determine the

faithfully representational net realizable value of inventories. In Bangladesh, the
alleviation of, or control on, coronavirus is uncertain in the foreseeable future.
Therefore, it is difficult too to estimate when business activities may get
normalized. Therefore, chances are that gradually declining in value,
inventories may ultimately perish and become completely obsolete.

1.3 Interest Rates

As at the end of July 2020, Bangladesh Bank has reduced its bank rate to 4.00
pa, the record lowest of all time (Bangladesh Bank, 2020). This action advocates
serving the purpose of increasing money supply in the market. Therefore,
reduced interest rates will enable commercial banks to loan more, and therefore,
lend more. Consequently, Companies that have outstanding debt securities with
higher stated interest rates will try to call them, and issue debts with lower stated
interest rates. However, due to the reduction in business activities and bad
performances, credit ratings of some companies may decline and reduce the
value of their outstanding debts. Therefore, these two opposite effects may
offset each-other to some extent.

The reformed interest rates may cause companies to modify their debt ratio in
the capital structure. Complications in reporting may arise regarding loan
modification, bonds or notes discount/premium amortization etc. In the context

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 of Bangladesh, an interesting fact is that financing through issuing debts has not
been prevalent yet.

Fluctuating interest rates have a significant impact on banking sectors and

nonbanking financial institutions. For example, commercial banks generally
have large amount of loans with higher interest rates as their liability since
trades before the pandemic outbreak were accelerating and the economy in
Bangladesh was flourishing. As soon as the pandemic froze trades, people’s
income faced a high downfall. People reduced spending as well as savings.
Banks also faced downturn in the return to their investments, i.e., returns from
investments in the real estate sector. Consequently, these changes will raise
complications in financial reporting, demanding newer and modified
adjustments to currently maintained financial reporting conventions. Some
complications may be described as follows:

• recalculating the expected future cash flows from a project.

• reassessing the credit rating of the company.
• extinguishment of the old, and issuance of new, bank loans and debts.
• adjusting the fair value of investments in securities.

1.4 Currency Exchange Rates

Companies that have their subsidiaries and associates abroad must adjust the
value of their foreign investments every certain period. The more stable the
relative currency rate, the less change in the value of investments. Also, if
inflation rate is minimum and interest rates are stable, the intrinsic value of the
currency, i.e., Bangladeshi Taka increases, turning foreign investments more
profitable and valuable. However, the coronavirus pandemic has caused these
factors to change inversely. Quite certainly, more inverse changes may result in
future. Consequently, inversely affected factors will result in complexities in
financial reporting.

Differentials in inflation and interest rates affect the currency rate. People of the
country facing severe inflation experience declining purchasing power. Thus,
the value of the currency declines in terms of the trading country’s currency.

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 However, annual inflation rate in Bangladesh is about 5 to 6% in average. But,
conditions of prevailing interest rate are not currently so satisfactory as
discussed earlier. Inarguably, there exist more such factors affecting the
currency rates.

Financial statement preparers might need to scrutinize and report effects of

changes in currency rates. Therefore, there may be excessive losses incurred
because of changing currency rates. The term ‘loss’ is preferable here
considering the extent of damage caused by the pandemic, i.e., Bangladesh is
more adversely affected than Malaysia.

1.5 Modification of Predetermined Business Contracts and Projects

Companies naturally seek growth, and target for wealth maximization.
Therefore, they search and analyze various profitable business projects, and, if
expectedly profitable, choose the preferable ones to execute in the foreseeable
future. Therefore, it is expected that companies have long before made
numerous business contracts and deals, not considering the risks that there could
arise a global pandemic and it could affect the predetermined contracts severely.
For instance, many banks authorized long-term loans amounting millions of
takas in the real estate sector. Obviously, real estate industry has collapsed
poorly due to the pandemic. Therefore, most of the loans granted are unreceived.
Pressures on the banks are upping. Some banks in Bangladesh reported
decreased revenue in the last quarter of 2019-20 fiscal year. Some incurred
losses as well. Many banks have been heard to dismiss employees to prevent
extra costs.

Another example, an air company might have contracted a business deal to buy
a new, highly customized airplane, assuming that demands in the seats for travel
purposes may surge in the ensuing summer. Nevertheless, business reality is
often hard to perceive in advance.

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1.6 Overall Potential Impacts upon Financial Reporting
Situations introduced by the coronavirus more or less affects most of the aspects
of financial reporting, either directly or indirectly. For example, a change in
market interest rate affects the credibility of the entity and the discounted cash
flows from using an asset. All these things together highly impact the
profitability of the firm. Therefore, there arises a significant change in income
components. Also, components of comprehensive income are affected due to
abrupt changes caused by impairment of assets, reduction in fair value of
securities etc.

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LO2 The New Issues We Have to Consider in Reporting
Analysis of potential impacts of COVID19 on financial reporting may include many aspects
and potential issues that need consideration. In this part, I present a brief of what new issues
we need to consider in financial reporting because of the COVID19.

Going concern: Due to declining economic activities, many firms are already
facing losses and constricting their operations. Therefore, the financial
statement preparers must perform assessments to determine whether the entity
will continue as a going concern.
Useful life and residual value: A firm’s operations affected by the Coronavirus may
indicate that the estimated useful life and residual value of PPE may change significantly.
Therefore, management must consider the potential impacts on these changes.
Comparability: The coronavirus pandemic will certainly induce firms to change
many long-going conventions and methods used consistently in financial reporting
over periods. For example, it may turn out compulsory for companies to change their
PPE reporting method from cost to fair value. Therefore, such many components of
financial statements will face such changes. This incident reduces the criteria for
comparability in financial reporting.
Additional disclosures: More detailed disclosures will be required for every
item impacted, of financial statements, due to the pandemic. Besides, since the
pandemic may change financial situations more frequently, publishing short
periodic disclosures may be necessary. These disclosures amid uncertainties
might enhance transparency in financial reporting to some extent.
Timely reporting: The prevalent pandemic restricts people to from convening
in one place. Therefore, companies may delay in arranging AGMs and publish
financial statements. Additionally, management might think about reducing the
time lag between publishing interim financial statements, to depict the actual
picture of the entity’s financial position.

Surely, there are other more considerations. I limit this section here because of the word
limitation imposed. However, the most important fact is that numerous noticeable issues in
financial reporting will certainly arise as a result of this pandemic.

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LO3 The Role of the Audit Committee
An audit committee is an independent body of a company’s board of directors that oversees
financial reporting and disclosure. This committee must be made up of independent outsiders,
at least one of them having a financial expertise. During the pandemic, the audit committee
undoubtedly be a major contribution in financial reporting. Their roles in financial reporting
are:

3.1 Risk Assessment

Members of the audit committee must take care of the fact that financial
statement preparers are properly assessing various risks, and their probable
impacts are transparently disclosed with sufficient evidences. The audit
committee may help the management assess those risks properly and disclose
them. They also must reassess the risk appetite and evaluate whether tolerances
are being adjusted appropriately based on emerging risks and material threats,
vulnerabilities and potential impacts.

3.2 Inquiries with Management, Personnel and Auditors

By inquiring, they need finding out what new accounting, internal control,
business continuity, legal and compliance and auditing matters are of concern.
They must also inquire whether there are any resource concerns and, if so, what
the mitigating plans are; whether specialists designated by the company to assist
in complex financial reporting issues or in internal audits have the ability to
meet the company’s financial reporting needs. Auditors must also be enquired
about how audit plans need adjustments to address changing risks and business
operations.

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3.3 Monitoring Information and Guidelines from SEC and
Other Authorities
Amid the ongoing pandemic, many aspects regarding financial reporting may
change. To address these, the regulatory authorities may issue orders or
guidelines when required. Obviously, companies need to follow those
regulations when preparing financial statements. However, some guidelines
might not prove beneficial for the company’s interest. In this case, the audit
committee is bequeathed with the responsibility to monitor and ensure whether
the firm is properly complying to those instructions.

3.4 Internal and External Audit Oversight

Cases are obvious where companies, for their benefit, attempt to manipulate
reporting of various financial statement components. And the professional
auditors are sometimes found the master behind these. Now an important
question is “Who will audit the auditors?” Well, the independent audit
committee must play the role. They must perform vigilant oversight over how
the auditors are doing their job. In this regard, they must remain informed about
what news is flowing from the financial reporting regulators.

Finally, audit committee is very important in the sense that the stakeholders of the company
receive the “true” information about that company’s financial aspects. Since the committee is
formed of independent outside members having expertise, it is highly expected that audit
committees can discharged their duties properly. However, only recently in Bangladesh has the
compulsory formation of an audit committee been regulated.

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LO4 Role of the Auditor
Considering the current conditions, the requirement for very transparently audited financial
statements and financial disclosures is beyond description. Since major changes will be sighted
in almost all the firms’ financial conditions, it is important to ensure that the financial
statements will depict the company’s financial position, financial performance, related risks
and other associated financial and nonfinancial factors in the most transparent manner. To
address these issues, the roles of the auditor are:

4.1 Professional Judgment and Skepticism

Accounting is, no doubt, a field requiring utmost judgment for most of the major
decisions in reporting. For this reason, the field of accounting can never be
totally replaced by artificial intelligence. Therefore, estimation, assumption, and
judgment are the most effective professional weapons for auditors, so that
auditors can apply their best judgment to depict the actual conditions of the
company. During this pandemic, the application of judgment and skepticism has
become more important to address various continuously arising issues.

4.2 Events after the Reporting Period

Usually there is a time lag between the date of the financial statement
preparation and the date of officially publishing the statements. During this lag
period, many significant events may take place and many material transactions
or future deals may occur, that the user of the financial statements must be aware
of. Therefore, Auditors need to ensure that significantly material events after
the reporting period are properly and transparently disclosed in the disclosures.

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4.3 Accurate and Effective Estimation
The higher the degree of uncertainties, the more the application of judgment and
estimation. For example, the useful life and the residual value of PPEs may
change drastically. In that situation, determining the new estimated amount of
these variables is quite a hard task since many complex issues including imputed
discount rates are a big concern here. And, very obviously, auditors are the one
who can restore the balance between uncertainty and readjustments.

4.4 Evidence-Based Auditing

Auditor design and perform audit procedures to obtain appropriate audit
evidence to be able to draw reasonable conclusions on which to base the audit
opinion. Coronavirus has imposed many challenges for auditors in obtaining
appropriate audit evidence. If the auditor cannot obtain evidence in the way that
the evidence was obtained before, alternative procedures need consideration.
When the auditor is unable to obtain appropriate audit evidence that is necessary
for the auditor to be able to conclude, consideration will need to be given to the
impact on the auditor’s report, including whether a modified opinion is needed.
Judgment will then be needed to determine whether the evidence is reliable for
the purpose for which it has been obtained.

4.5 Combating Challenges in Group Auditing

Companies that have their subsidiaries all over the world may face various
challenges in financial reporting. The reason is that coronavirus has not affected
all the territories with the same level of intensity. Therefore, different
subsidiaries are affected with different level of intensity. Naturally, difficulties
arise in preparing consolidated financial statements. One subsidiary’s
operations may get severely affected whereas another is less affected. So, when
auditing, auditors need to look at the financial statement components of each
subsidiary from different viewpoints.

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Conclusion
As I drew a commonly estimable conclusion in the Introduction section, financial reporting
field cannot be replaced by artificial intelligence. Therefore, amid any emergency, the roles of
the financial reporting experts become more significant. After the end of this pandemic, many
long-going conventions will completely be replaced by modified and flexible ones. These
changes will arise out of the application of currently requiring financial reporting and auditing
treatments.

In future, financial reporting will become more technology-based, but the application of human
judgment will always be an inevitable necessity in the financial reporting field. Many
companies would try to take advantage of the pandemic by manipulating figures and
information in the financial statements. But the strict inspection and scrutiny of the audit
committee is very significant to prevent these actions. Also, auditors perform a key
responsibility in ensuring transparent reporting, though they have to struggle to address the
changing financial environment all over the globe.

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References

COVID-19 | Financial reporting - KPMG Global (2020) KPMG. Available at:

https://home.kpmg/xx/en/home/insights/2020/03/covid-19-financial-reporting-resource-
centre.html.

El-Mousawi, H. and Kanso, H. (2020) “Impact of COVID-19 Outbreak on Financial

Reporting in the Light of the International Financial Reporting Standards (IFRS) (An
Empirical Study),” Research in Economics and Management, 5(2), p. p21. doi:
10.22158/rem.v5n2p21.

Galindo, R. (2005) “Are the Going Concern Principle and the Auditing Process Compatible
At All? The Behavior of Auditors Regarding the Application of the Going Concern Principle
in Auditing Reports,” SSRN Electronic Journal. doi: 10.2139/ssrn.729223.

Interest rates (2019) Bb.org.bd. Available at: https://www.bb.org.bd/econdata/intrate.php

(Accessed: December 3, 2019).

Internal Audit considerations in response to COVID-19 (no date) Deloitte Switzerland.

Available at: https://www2.deloitte.com/ch/en/pages/audit/articles/internal-audit-
considerations-in-response-to-covid-19.html (Accessed: August 6, 2020).

Quinsaat, G. (2012) “Role and Function of Public Company Audit Committee,” SSRN
Electronic Journal. doi: 10.2139/ssrn.2057148.

Understanding the impact of COVID-19 on financial reporting (no date) Grant Thornton LLP
Canada. Available at: https://www.grantthornton.ca/insights/coronavirus-covid-
19/understanding-the-impact-of-covid-19-on-financial-reporting/ (Accessed: August 6,
2020).

What audit committees need to consider in the face of uncertainty (no date) www.ey.com.
Available at: https://www.ey.com/en_us/board-matters/what-audit-committees-need-to-
consider-in-the-face-of-uncertainty (Accessed: August 6, 2020).

Why Audit Committees Are So Important During the COVID-19 Crisis (2020) NACD
BoardTalk. Available at: https://blog.nacdonline.org/posts/audit-committees-covid-19
(Accessed: August 6, 2020).

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