The COVID-19 situation has caused a lot of upheaval in the business world, such that multiple businesses are scrambling to stay afloat in this pandemic situation. The coronavirus outbreak has also brought to light fresh challenges for the Indian economy, creating serious disruption in both the demand and supply chains, consequently derailing the prospects of growth during this time.
As per a survey, the coronavirus outbreak has affected the operations of around 50% of companies and led to declining cash flows for around 80% of them. The growth rate of the Indian economy is also at a six-year low of 4.7%.
Without doubt, the financial accounting and financial reporting niches have also been affected. There are several functions and processes that have been deeply hit by the crisis. For example, due to the uncertainty, it has become difficult to predict profit and loss calculations, thereby impacting financial statements, and ultimately the balance sheet of a company.
Below, let’s look at the individual aspects of financial accounting that are impacted.
### Impairment Analyses
Impairment can simply be defined as the excess of the carrying amount of an asset over its recoverable amount. This means that there’ll be a potential negative amount that’ll be created as opposed to the previously existing future cash flow system.
As a result of the crisis caused by the Covid-19 virus, since the supply and demand chains have been severely hit, it’s the assessment of these areas which will help in understanding the impairment. For example, some of the indicators of impairment that can be figured out are obsolete inventory or dipping market value of cash generating units.
The IAS 12 Income Taxes record explains deferred tax assets as one that can be “recognised for deductible temporary differences and unused tax losses (tax credits) carried forward, to the extent that it is probable that future taxable profits will be available.”
For determining whether any future taxable profits will be available, companies need to assess the probabilities of future taxable profits and tax planning opportunities. However, in the present circumstances, the company forecasts have become difficult due to frequent changes in forecast cash flows, changes in company tax strategies, and changes in government measures.
Businesses and companies are facing serious challenges with cash management cycles. This is resulting in non-payment of loan installment dues, confusion about submission of essential details to lenders, inventory audits for working capital demands, and irregularities in salary payments, which combined is finally impacting the production cycle.
The impairment of cash flows would also impact the submission of statutory dues such as the Provident Fund (PF), Employee Provident Fund (EPF), and Goods and Services Tax (GST). This can result in unfavourable audit reports by auditors.
It’s not just the stock markets which have been affected, but also other markets that are causing serious problems in assessing fair value. This has left businesses in serious quandary, creating a dilemma as to whether they should call for impairment. The most affected will, undoubtedly, be the startups and private organisations. In any case, taking a permanent decision will be impossible at this time. There should be ample discussions and deliberations between auditors and companies to resolve all possible complications.
As per Notified Accounting Standards, revenue can only be recognised when there’s a chance that the consideration will be collected, or it’s stated that it’s unreasonable to expect collection at the time of sale or rendering of service. It’s important to understand that this includes not just the customer’s ability but the willingness to pay the dues. However, in the present crisis, trying to assess a customer’s intention to pay can cripple the revenue recognition process. This poses a challenge for the auditor to accept recognised revenue.
Finally, businesses will also try to explain their low profitability by presenting extra line items. If the items of income or expense are material, then their nature and amount can be shown in separate entities. Businesses can also provide a justification for the separate disclosures. However, the difficulty will come for the auditor to certify the same on the basis of the rationale provided by businesses.
There have been several steps taken by the government to provide some relaxation and relief to businesses to help them wade through the crisis.
The Government of India (GoI) has made an announcement that it’ll be issuing all pending income tax refunds up to Rs 5 lakh and GST custom refunds with immediate effect. This has been announced as a relief measure to ensure that small and medium businesses (SMBs) don’t face a cash crunch during the lockdown. As per the statement issued by the Finance Ministry, this step is believed to benefit around 14 lakh taxpayers.
Since presently only shops and businesses selling essential items are allowed to be functional, SMBs are suffering quite a lot during the lockdown. This is where the refund comes in, which is believed to amount to a total of Rs. 18,000 crore.
With the growing health concerns over the coronavirus outbreak, the Finance Ministry has also announced several financial relief measures to help companies deal with the crisis. This includes concerns regarding IT returns, compliance, and deadlines related to GST, IBT, and compliance-related issues.
Among the many relief measures announced by the Finance Ministry, one of the most important has been relaxation of due-dates for statutory and regulatory compliances related to Income Tax, GST, and Corporate Affairs.
Income Tax – These are applicable both for individuals as well as businesses:
GST – For those who are registered under the GST structure:
Corporate Affairs – These are applicable for Private Limited, OPC, and LLP:
These due-date relaxations and relief measures are expected to reduce the challenges of businesses in terms of financial accounting and financial reporting. It’s important for businesses as well as the government to fight the COVID-19 virus together to ensure that the Indian economy can bounce back to its desired growth in due course of time.
Cloud accounting software like Giddh can help reinstating some order in the midst of all this chaos and help business owners have a clear understanding of cash flow and balances during this lockdown and help them make informed decisions.Talk to our representative for a free trial.