ICAI Guidelines on Covid 19 Fallout For CFOs and Auditors

The whole world is coming out with their advisories for dealing with the implications of the Covid-19 Fallout. The sole accounting body in India has not left its footprint for the same.

Although SEBI has given more time to file earnings reports, corporates are still trying to meet their internal deadline amidst this fight against the Coronavirus. This puts a very high pressure on CFOs and Auditors to close the numbers and sign off while working from home.

The ICAI has released its guidelines for CFOs and Auditors on how to handle certain specific accounting issues due to Covid-19.

We have summarized possible accounting implications under Ind AS reporting related to Covid -19.

1. Inventory:

Reconsider Inventory Valuations to the “Net Realizable Value” considering the following:

1. Reduced movement in inventory
2. Decline in selling price
3. Inventory obsolescence due to lower expected sales
4. Amount of fixed overhead allocated to each unit of production shall not be increased as a consequence of low production or idle plant.

2. Leases

1. Changes in the terms of lease arrangements or lessor may give some concession to the lessee with respect to lease payments, rent free holidays etc. All this may lead to the application of “Accounting relating to the Modification of leases”
2. Anticipated revisions should not be considered
3. Discount rate used to determine the present value of new lease liabilities may need to incorporate any risk associated with COVID-19
4. Compensation given by Government to the lessor for providing benefits to lessee can be accounted either as lease modification as per Ind AS 116 or government grants as per Ind AS 20.

3. Revenue

1. Due to COVID-19, there could be likely increase in sales returns, decrease in volume discounts, higher price discounts etc. Under Ind AS 115, these factors need to be considered in estimating the amount of revenue to recognized, i.e., measurement of variable consideration
2. Ind AS 115 also requires disclosure of information that allows users to understand the nature, amount, timing and uncertainty of cash flows arising from revenue. Therefore, entities may have to consider disclosure about the impact of COVID-19 on entities revenue

4. Going Concern Assessment

1. Management of the entity should assess the impact of COVID-19 and the measures taken on its ability to continue as a going concern
2. The impact of COVID-19 after the reporting date should also be considered and if, management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so, the financial statements should not be prepared on going concern basis
3. Necessary disclosures as per Ind AS 1 shall also be made, such as material uncertainties that might cast significant doubt upon an entity's ability to continue as a going concern

5. Property Plant and Equipment

1. PPE can remain under-utilized or not utilized for a period of time. It may be noted that the standards require depreciation charge even if the PPE remains idle
2. The management may review the residual value and the useful life of an asset due to COVID-19 and, if expectations differ from previous estimates, it is appropriate to account for the change(s) as an accounting estimate

6. Impairment of non-financial assets

Preparer to consider the following factors for impairment testing

1. Contraction in economic activity due to COVID-19
2. Changes required in the recoverable amounts before the outbreak of COVID-19
3. Adjustment required in the discount rate to measure the recoverable amount
4. Update required in management’s forecasts/ budgets for future cash flows
5. Whether assumptions are reasonable for estimating the value-in-use and fair value less costs of disposal and ensure that the impairment loss

7. Borrowing cost

The capitalization of interest is suspended when development of an asset is suspended. The management may consider this aspect while evaluating the impact of COVID-19

8. Provisions, Contingent Liabilities and Contingent Assets

1. Some contracts may become Onerous due to increase in cost of material/labour, etc. Management should consider whether any of its contracts have become onerous and account the same.
2. Ind AS 37 also requires assets dedicated to a contract to be tested for impairment before a liability for an onerous contract is recognized.
3. Management should disclose that it has assessed whether executory contracts are onerous due to the adverse impact of COVID -19
4. If the management is unable to assess whether some of the executory contracts have become onerous due to inadequacy of information, the same should be disclosed
5. A provision for Restructuring costs is recognized only when the general recognition criteria for provisions are met and when there is a detailed formal plan for the restructuring and there is evidence that the entity has started to implement a restructuring plan (for example, by dismantling plant or selling assets or by the public announcement of the main features of the plan)
6. Entities may have insurance policies that cover loss of profits due to business disruptions due to events like COVID-19. Entities claims on insurance companies can be recognized in accordance with Ind AS 37 only if the recovery is virtually certain (i.e. the insurance entities have accepted the claims and the insurance entity will meet its obligations)
7. Ind AS 37 does not permit provisions for future operating costs or future business recovery costs. However, disclosure of nature and timing of outflow is allowed

9. Income Tax

1. Entities with deferred tax assets should reassess forecasted profits and the recoverability of deferred tax assets, considering the additional uncertainty arising from the COVID-19 and the steps being taken by the management to control it
2. Management might also consider whether COVID-19 affects its plans to distribute profits from subsidiaries and whether it needs to reconsider the recognition of deferred tax liability in connection with undistributed profits
3. Management should disclose any significant judgments and estimates made in assessing the recoverability of deferred tax assets, in accordance with Ind AS 1.

10. Fair Value Assessment

In determining the Fair value measurement or disclosure requirements, adequate management consideration and professional judgment is required in determining whether the quoted prices are based on transactions in an orderly market. The following factors should be considered:

1. Significant volatility or indications of the significant decline in market prices of financial instruments like equity, bonds and derivatives.
2. Significant decrease in volume or level of activity.
3. Preparers should be guided by the application guidance in Ind AS 113 that indicates circumstances in which the transaction is not considered an orderly transaction (i.e. not a forced liquidation or distressed sale)
4. Preparers using valuation techniques may have to consider the impact of COVID-19 on various assumptions including discount rates, credit-spread/counter-party credit risk etc.

11. Derivative Accounting

Critical factors to be considered for Hedge accounting:

1. If entities have adopted cash-flow hedge accounting for certain forecasted transactions, they should assess whether the transaction still qualifies as a highly probable forecast transaction considering their business environment.
2. Assess any hedge ineffectiveness and record the impact of that in profit and loss
3. Estimate the fair value of derivatives, including paying special attention to underlying assumption of derivatives, e.g., forward curve of interest rate, foreign currency, commodity etc.

In case you need to ascertain implications on your business, please reach out to our experts for a Free Consultation. You can email your queries to Mr. Ravi at ravi.k@tya.co.in

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