Companies would have to prepare for unexpected financial developments to mitigate the effects of Covid-19. Actions taken in response to the spread of COVID-19 have resulted in significant disruption to business operations and a significant increase in economic uncertainty, with more volatile asset prices and currency exchange rates, and a market decline in long-term interest rates in developed economies. Major changes have happened, S&P cut India’s growth outlook to 1.8 percent. CRISIL too lowered its GDP growth projection to 1.8 percent. Moody’s hinted decline in the GDP growth rate and projected a 0.2 percent growth for FY 20, a drastic shift from their earlier forecast of 2.5 percent.
It is a serious concern for many regarding how the Covid-19 will impact the accounting and audit practices particularly at the time of book closure. Uncertainty in the business environment would require revision of estimates on revenues and expenses as accounting involves the use of judgment on the expected cash flow stream and expense of a company.
There is a possibility of failure and delay to repay the loans from creditors in the current scenario. Hence, an additional provision for bad debts needs to be figured out by the companies. Loan-loss is going to be affected more on banks, since their clients may not be able to pay back the loan in due time. The estimated life of the physical asset needs to be re-assessed due to the ongoing plant lockdown and lack of maintenance and servicing of equipment.
Holding companies need to adjust or record an impairment of their investment in subsidiaries in their balance sheet since the stock price of many firms is at a record low. Also, the companies need to prepare themselves with certain unusual or infrequent items in their accounts. There needs to be much caution and care while making judgments on estimates based on the “going-concern” principle as the COVID catastrophe is spreading across the globe.
The Institute of Chartered Accountants of India(ICAI) has issued an advisory on the “impact of Coronavirus on Financial Reporting and the Auditors Consideration”. It is to familiarize the preparers and auditors with some critical areas that require special attention amid this pandemic. The ICAI guidelines also warn that, due to Covid-19, there could be a possibility of an increase in sales returns, a decrease in volume discounts, higher price discounts, etc. Therefore, the amount of revenue to be recognized needs scrutiny given the scope of Ind AS 115.
There may be issues in the auditing field also, as it would be difficult for auditors to access the client location to conduct the stock audit and cash audit amid this situation. However, the quality of the auditing cannot be compromised, says the ICAI’s guidance. To conduct auditing effectively, auditors have to come up with alternate arrangements. Meanwhile, the applicability Companies (Auditor’s Report) Order (CARO) 2020, which mandates newer and more stringent audit rules, has been postponed to the next financial year