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Covid 19 and Financial Reporting Apprehensions

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The pandemic Covid 19 has considerably affected the business operations of the entities. The unprecedented event have emphasized the thought on financial reporting and the disclosures implications for the business entities. The uncertainty in the economy supplemented by diverse risk has defied the estimates and forecasts for the enterprises. The assumptions of going concern and revenue recognition stands pessimistic due to the rising impairments and losses regardless of the sector. The corporate earnings are taking a hard hit due to the dip in the earnings growth rate affecting the valuation metrics. Key inputs like cash flow forecasts and discount rates are likely to change for the sectors with higher volatility in demands. Disruption in the production and supply chain, shifting demand trends have significant impact on inventory levels leading to higher overhead allocation on inventory due to lock down. The impact of unanticipated slowdown in the economic activity on the inventory valuation and write offs necessitates descriptions to the note in the financial statements. Additional disclosures are necessary for the financial events arisen due to the pandemic insecurity. As the volatility in the market have increased the fair value measurement for the financial instruments has to be reviewed. Assets reported on fair value basis will have realized or unrealized losses How far the effect of the pandemic on the business should be reported in the financials and whether the failure to report in the disclosures will lead to breach on the materiality, true and fair view. Measureable uncertainties that cast substantial ambiguity on the company’s ability to function under the going concern basis need to be reported and disclosed in the financial statements. Disclosures should be inclusive of those significant assumptions and judgments applied in making going concern assessments Companies need to revisit their accounting estimates and review the practicality of the accounting system.

Dr. Deepa Pillai

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