- April 17, 2020
- Posted by: IBA LLP
- Category: Articles, Others
Impact of COVID-19 on Accounting Estimate
We are amidst an unfortunate coronavirus outbreak. This situation continues to evolve and is being monitored with various remedial and preventive measures being undertaken. As we cope with this situation and challenges, an aide-mémoire of some important implications on Accounting Estimates is summarised here.
Impairment of Non-Current Assets and Goodwill:
Many companies may be facing the problem of lesser demand for their products or services or may be affected by the conditions imposed by the government/administration. Certain companies may be dependent on supply chains or may have production facilities in the states in India and abroad affected by lockdown. This situation could be an impairment trigger, and require an impairment test. However, it could be a challenge for many companies to predict future cash flows due to the increase in economic uncertainty. Also companies would need to make sure that discount rates used in recent valuations have been updated to reflect the risk environment on the reporting date.
Companies would require to give disclosures as per Ind AS 36, Impairment of Assets and also help users understand uncertainty associated with management’s assumptions about the future. Therefore, robust disclosures are needed to understand the degree of estimation uncertainty that exists in estimating the recoverable amount and the sensitivity of the recoverable amount to reasonably possible changes to key assumptions.
Onerous Contract Provisions:
Customer contracts may become onerous if, for example, vendors are unable to fulfil their obligations under the contract as a result of lockdown or reduced production by manufacturing plants, which would require recognition of a provision. Delay in discharging of contractual obligations may also result in penalties to be provided for. Companies should look at providing meaningful disclosures about judgements and estimates applied in recognising and measuring provisions.
Valuation of inventory:
There could be a significant impact on the inventory valuation on account of forced plant shutdowns, decline in net realisable value due to reduction in demand and non-fulfilment of sales and purchase contracts.
Expected Credit Losses (ECLs):
Certain sectors and regions may be extremely affected by the economic effects of COVID-19. Hence, companies would require to consider the impact of COVID-19 appropriately while recognising ECLs. However, the companies may find it difficult to incorporate into their measurement of ECLs the forward-looking information relating to the economic impact of COVID-19 that is available without undue cost or effort at the reporting date. Appropriate disclosures should be provided to enable better understanding of credit risk, timing and uncertainty of future cash flows.
Deferred Tax Assets:
The recoverability of deferred tax assets may be impacted by changes to future forecasts.
The companies may assess the terms of their insurance policies and estimate possible payouts surrounding loss of profits and business disruption, etc. including timing of recognition of such claims.