Accounting and Earning Implication of Covid-19

 

 

 

 

 

Accounting and Earning Implication of Covid-19

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Accounting and Earning Implication of Covid-19

Introduction

Covid-19 is a deadly disease that was first identified in Wuhan, China, where patients suffered severe respiratory problems. More than 2.9 million have been reported infected, including more than 200,000   people losing their lives.   This disease’s problem is that it spread through contact and it is more dangerous to older adults and people with health conditions.   The causative agent of covid-19 has been changing since it was first reported, and scientists believe the disease’s virulence has enhanced the changes. Recently there is no antiviral treatment and vaccine available for covid-19 (Lanz et al., 2020). The treatment focuses on symptomatic and respiratory based on health authority in every country and most countries follow the WHO protocol and guidelines.  Patients also indicate severe symptoms of accepting oxygen, and in critical cases, passive immunization is carried as a rescue treatment. Finding treatment for covid-19 has emerged as a global public health issue and various companies are working to find medication or vaccine for covid-19.

Covid-19 is known to have caused by agents known as Severe Acute Respiratory Syndrome Coronavirus (SARS-Cov-2).   Covid-19 patients show non-reproductive cough, fever, diarrhea, pneumonia, fatigue, and fever is the most reported system with 90% and the dry cough has 75%.   The patience shows an inflammatory response after the virus’s entry and may damage airways (Lanz et al., 2020). The life cycle of covid-19 causative agents is divided into four stages entry of the virus, expression of protein, transcription and finally, the virus is released from the cell. SARS-CoV-2 has an incubation period of 6.4 days with a possible transmission. Infection is always manifested after incubation and death fluctuate between 6 to 41 days at an average of 14 days.  Patient age and condition of the immune system are determinant during this period. The primary step for covid-19 in isolation to prevent any contact that may cause the transmission. When the patient experiences mild symptoms, they are managed at their residence and good counseling to patients about signs and symptoms of covid-19. The first management protocol includes managing cough and fever.

The outbreak for covid-19 has an extensive disruption in the global economy as many countries use precautions such as transport restrictions and limitations of operating activities have been enforced. Covid-19 pandemic has demand investors and stakeholders to find financial information to keep their business working (Lanz et al., 2020). Accountancy firms and other regulators are available for advice and guidance concerning accounting and financial reporting that need to be addressed.   This paper will examine accounting and earning implications caused by covid-19 pandemic, recommendation, and concluding remarks.

Issues

 Impairment of assets in companies

Impairment of assets requires the company to assess non-financial assets for impairment if indicators are existing. The companies are encouraged to undertake impairment testing appropriately and need to assess whether covid-19 has led to impairment of assets. The financial performance, which includes estimating the potential cash flow and earnings, may be affected indirectly or directly by this pandemic (Appelbaum et al., 2020). Companies focus on goodwill when dealing with impairment assets and it evaluates other assets that could be impaired, such as inventory, rights to use asset and equity Investments. Evaluation of assets and ensuring that appropriate assessment is reflected in the entity’s financial statement requires a coordinated effort with all cross-functional expertise. Concerning the duration of covid-19, companies need to employ more careful consideration as they work in impairment assessment about goodwill assets, equity investment and others (Appelbaum et al., 2020). Management should focus on informed judgment as it relates to results on financial reporting issues. It is challenging for companies to update their forecasts that have been rendered due to the outbreak of covid-19. Companies must develop cash flow projections to communicated expected impacts in the current environment. The scenario in forecasting helps the company to identify risk and provide a control framework concerning financial information.

The risk associated with covid-19 can be reflected in cash flow or discount rate when considering an appropriate assumption. Companies must ensure the outcomes are indicated in the future value of cash flow. The company’s long-lived asset is assessed for impairment and indicators are identified. Long-lived assets include intangible and right to use assets and intangible assets, including those not ready for use and tested for impairment. Some of the company’s assets that don’t qualify to be long-lived assets are assessed for impairment. Entities need to account for the recoverable amount of liability and assets in all operations (Appelbaum et al., 2020). The calculation requires an estimate of future cash flow expected and the variation that is also likely to exist. The cash flow that is forecasted should reflect the economic condition of remaining assets.

Revenue

Entities are experiencing a decline in revenue and a decrease in the progress of delivery of performance. A decrease in revenue is arising from a reduction in volume and a change of valuable consideration. Changes in the economic environment cause customer and businesses to modify the contract, thus reducing the revenue. The variable consideration refers to changes that affect the assumption used when measuring the revenue of products that have been delivered. Valuable consideration always occurs if the contract includes penalties, performance bonuses and price changes (Laura et al., 2020). Consideration factors are needed to be adjusted in each reporting date. As a result of these factors, companies will be required to be reported in response to 31 December 2019.

Covid-19 has caused a significant decrease in revenue in many countries and the decline has been caused by the economic slowdown and tax policy measures taken in response. Thus, business activity disrupts economic activities, reducing revenue (Laura et al., 2020).   For example, social distancing has a more significant effect on the tax base and tax-paying compliance.  The outbreak has affected the economic structures permanently. In some countries, the external factors are under pressure, resulting in depreciation, impacting tax revenue. Forecasting revenue in current circumstances is very challenging, but it is unavoidable.  The new development of the outbreak and restrictive measures make various governments concentrate on revenue forecasts. Government renews forecast by making use of assumption about the pandemic and unnecessary biases. Policymakers are making policy choices that need to include information about revenue forecasts.

The method used on forecasting revenue is through applying aggregate tax buoyancy to GPD of the country.  The buoyancy indicates the percent changes in tax revenue that result from the change in GPD (Laura et al., 2020).    Buoyance shows the structural features of a given economy, systems and policy measure used in the cycle.  Many countries are using exceptional tax policy along with administrative measures concerning the covid-19 crisis. Governments are therefore taking their cost into accounting when forecasting revenue. In most cases, they are distinguishing the forecasts that assume constant policies and apply new policy measures. In this regard, over the use of tax buoyancy, most countries are using tax elasticity and this is the percentage change in a new standard of tax revenue.  Tax elasticity is precise and it gives a baseline projection by which new measures are identified and added.

Entities of different sizes are exposed differently, where small businesses are not diversified in more than one sector (Laura et al., 2020).    In most countries, tax recipients are dominated by large taxpayers and they provide more reliable information than other expected recipients. The fall in price commodities also indicates a decrease in revenue.  For instance, there is a decline in the price of crude oil, which will impact revenue to countries that are producers. Still, covid-19 has hampered the administration’s ability to collect tax and it has further affected taxpayer compliance. The financial crisis analysis indicates that many taxpayer compliances tend to decrease in the economic downturn, but they will recover after the pandemic of covid-19. In the current situation, revenue will be affected since many counties are delaying filling their payment date.  Countries are becoming very slow when supporting the taxpayer cash flow and they delay to allow people to fill their return in person due to social distancing. The collection mechanism of tax has a more significant negative impact on revenue.

  Fair Value Measurements (FVM)

Change in FVM requires the company to disclose its valuation method and input used. Also, changes in FVM cause the entity to reveal the sensitivity of the valuation to any assumption. Disclosing information is vital and enables the user to understand if the covid-19 is considered a purpose of FVM (Golden & Russell, 2020). In the current situation, FVM of financial instruments will be viewed to indicate that all values show condition indicated in the balancing sheet of the reporting date. The process involves inputs that indicate how participants consider the pandemic’s impact in expecting their potential cash flow related to assets.

FVM of the financial instrument should indicate the participant view and market information taken in measurement dates under the current condition. Observable information is not ignored, even when the depressed price is temporary (Golden & Russell, 2020). Businesses need to pay attention to FVM based on unobservable inputs and ensure that they reflect the impact of covid-19. The businesses are required to measure the assets at fair value and the estimate is based on the assumption provided by a market participant.  If the company is making judgments on FMV, it considers the conditions that are known by participants. FVM impact depends on the evaluation of whether the outbreak of coved 19 at the reporting date impacted market participant assumption at that specific time.

 Government grant

The government has the responsibility to offer people and individual industries assistance to the outbreak of the Covid-19 pandemic. The government provides support measures, including tax exemption, reduction, and unused tax losses, among many others.  Support measure has a significant impact on financial reporting (Levy & Howard, 2020).    Support measures such as relief fall under the standard of income tax and government assistance. When accounting for income tax consequences, it is essential to consider if the government has enacted the relevant law. Entities need to determine if the changes in tax rates that were passed during the reporting date and the feature of tax relief should be assessed to determine if they are accounted as a decrease in income tax or   receipt of government assistance

 Contract Modification

Many companies are affected by the covid-19 outbreak and most of them are experiencing cash flow challenges due to disruption of operation and high operating costs. Also, loss of revenue has affected many companies and as a result, many are demanding additional financing from government grants or modification of existing contracts. Even companies are amending terms used in debt agreement if they do not satisfy the covenant agreement. Moreover, financial institutions and banks are encouraged to help borrowers by providing relief on cash flow (Liu et al., 2020). As a result, the process considers the modification of a contract and the institutions are needed to measure the customer loan portfolio and the credit losses.

Besides, in response to covid-19, the business debtors seek to renegotiate the terms of the arrangement. Many businesses are facing challenges and there are amending the exiting agreement based on the cash flows. The companies may also modify obligations under consumers and customers (Liu et al., 2020). The outbreak of this pandemic has changed the party’s rights in many ways. Many businesses reduce purchasing commitment, and others terminate the old contact and provide a new contract since the remaining products are distinct.

Covid-19 has primarily affected borrowers and they have difficulties meeting their specific obligation in loan relationships.   Borrowers have exposure to economic consequences in their working areas or industrial sectors; thus, the downturn of economic growth increases the probability of many defaulter cases and loss of rates rises. The outbreak’s impact has generally challenged banks and other lending parties (Liu et al., 2020). The challenges are also significant to non-financial corporates since ECL applies to many investments that aim to make interest through financial assets and trade receivables. The exposure of non-financial corporates is always greater due to the existence of intragroup loans and guarantees.

Covid-19 outbreak needs to revisit its matrix approach and consider the timing of   ECL. Companies must consider the previous credit losses based on historical experience that cannot be reflected in current conditions. Companies should also consider the disruption experienced by customers and suppliers on debt repayments (Liu et al., 2020).   Trade receivables are having the interest rate of nil and there is a delay in the collection that increases loss allowance.

Hedge accounting

Hedge items such as sale volume, debt issuance, and business acquisition have been affected by the covid-19 pandemic.  Sale volume is falling below the level, which was initially forecasted.   Debt issuances and business acquisition are delayed and many companies are discontinuing hedge accounting and either encounter loss or gain. Change of timing of the hedged transaction affects the loss or profit of the entity (Mahenthiran et al., 2020). Companies reflect the timing of hedged items and fair valuation to determine ineffectiveness recognized as profit or loss.

Suggestion recommending to the way out of the issues

I would recommend companies consider an indicator for company assets that are tested on a sole basis. The company should critically assess the impact of measures taken to account for the covid-19 pandemic and assess whether the net asset is higher than market capitalization (O’Dwyer et al., 2020).  To combat impairment asset issues, the company should have the actual financial performance and it should be lower than the original company budget. Also, the company should ensure that the current cash flow slightly lower those early forecasts. The companies should give a change in business modern and discontinue some of the operations. Offering restrictions in some company activities such as import-export and travel operation can solve the impairment asset issues.

Solving the impairment asset helps the company get ahead of the assessment, giving time to communicate the impact of impairment on business investors. Companies should also initiate the conversation with auditors earlier and this help to avoid surprises during assumption used in impairment evaluation (Zhang, 2020). It is equally essential for the companies to ensure that they have appropriate documentation to support their conclusion in applying impairment models.  The entity should also ensure that judgment made is not inconsistent and they should base on reasonable assumption.

I would encourage tax administration to identify strategies to mobilize revenue in the current situation. Therefore, tax administration should enhance compliance improvement from the collapse of a commodity such as oil. The tax administration should also enhance taxpayer services to stat with companies and discuss their technical problems. Also, administrators should focus on proper liabilities and payment terms that were established in 2019.  Tax administrators should monitor risk identified in the current reporting period and they should prioritize current compliance considering the compliance issues. Moreover, I would recommend the government manage compliance issues and mobilize revenues (Lanz et al., 2020).  When the company is involved in revenue administration, the government will address the conflict of transparency issues. Companies need to focus on the timing of revenue recognition when it cannot satisfy performance on time and should determine if there are penalties that can affect transaction prices.

On cases on government assistance, I would recommend managing a different entity to consider if the government’s grant meets the definition of government grant as outlined in the policy. Companies should also consider the measure provided by the government to control the pandemic and it should consider the impact of that measure. Companies should identify the nature of the grant provided to have sufficient specific obligations associated with the company. The company that benefits from government assistance should focus on disclosure requirements (Mahenthiran et al., 2020). The company should disclose the nature of the grant recognized and it should show another form of government it has benefited.  The company should also indicate the unfulfilled conditions attached to government assistance that needs to be disclosed.

The issues of contract modification can be solved in the circumstance when the entity evaluates if the modification is considered as a separate contract. I would recommend d companies negotiate their agreement with suppliers and customers for significant company activities (Laura et al., 2020). Companies should also monitor regulatory action in a given jurisdiction, which helps the company determine whether it requires taking more measures.

Credits within banks and other lending institutions need to focus on forecasted economic shocks, which can be incorporate into impairment models.   The financial institution should estimate ECL on useful and supportive information. Companies will need the impact of the pandemic on it ECL computation and all assumption should be considered. The company would be needed to have additional disclosing information in its financial statements.   The companies should also include detail concerning credit risk management and how it is related to ECL measurement (O’Dwyer et al., 2020). If the company has changed its practices on risk management in response to coved-19, it should indicate financial statements. Also, I would recommend companies be mindful of the different trade receivables that would be impacted by many economic factors that would eventually result in loss rates. I would recommend the entity to consider if the hedge transaction is likely to occur. If it does not occur, the hedge accounting should be discontinued and the available gain and losses should be classed as profit or loss.

  Concluding remarks

Disruption from covid-19 has significantly impacted companies across the world. The government and management of companies face problems in making difficult decisions about the operation cost and financial matters. The consequence of financial matters is very complex and there is uncertainty in the economy and future earnings (Zhang, 2020).  Company management should consider the impact of covid-19. They should use the financial statement that may prepare the company to cope with various issues such as contract modification, fair value measurement, government grant and Expected Credit losses. The entity is required to review all area account, which is subject to judgment.

 

 

 

 

 

 

References

Appelbaum et al. (2020). Auditing and Accounting During and After the COVID-19 Crisis. 90(6), 14-19.Retrieved From: https://search.proquest.com/docview/2420174156?accountid=151051

Golden & Russell. (2020). Seven Years at the Forefront of Standards Setting. 90(5), 16,18-19. Retrieved From: https://search.proquest.com/docview/2420174156?accountid=151051

Lanz et al. (2020). Information Security Program Management in a COVID-19 World. 90(6), 28-35. Retrieved From: https://search.proquest.com/docview/2420174156?accountid=151051

Laura et al. (2020). Impact of lockdown on COVID-19 epidemic in Île-de-France and possible exit strategies. 18, 1-13. doi.org/10.1186/s12916-020-01698-4

Levy & Howard. (2020). Financial Reporting and Auditing Implications of the COVID-19 Pandemic. 90(5), 26-33. Retrieved From: https://search.proquest.com/docview/2420174156?accountid=151051

Liu et al. (2020). The challenges and opportunities of a global health crisis: the management and business implications of COVID-19 from an Asian perspective. 19(3), 277-297. .doi.org/10.1057/s41291-020-00119-x

Mahenthiran et al. (2020). Stock Market Contagion during the Global Financial Crises: Evidence from the Chilean Stock Market. 9(8). doi.org/10.3390/ijfs8020026

O’Dwyer et al. (2020). Shifting the focus of sustainability accounting from impacts to risks and dependencies: researching the transformative potential of TCFD reporting. 33(5), 1113-1141. doi.org/10.1108/AAAJ-02-2020-4445

Zhang. (2020). Five Basic Insights into the Economic Impact of the COVID-19 Outbreak *. 15(2), 167-178. doi.org/10.3868/s060-011-020-0008-8