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.
COVID-19 Impact on Financial Accounting
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.
Deferred Tax Assessment
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.
Fair Value Measurement
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.
A Note on Government Relief Measures
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.
Due-Date Relaxations for Income Tax, GST, and ROC
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:
- The due date for filing IT Returns for financial year 2018-19 has been extended to 30th June, 2020 from 31st March, 2020
- The due date for linking PAN and Aadhar has been extended to 30th June, 2020 from 31st March, 2020
- The date for making investments and payments to claim deductions under Section 80C (LIC, PPF, NSC etc.), 80D (Mediclaim), and 80G (Donations) have been extended for 30th June, 2020 for financial year 2019-20
- All delayed payments of advance tax, self assessment tax, TDS, TCS, equalization levy, STT, CTT which have been made between 20th March, 2020 and 30th June, 2020 will be charged at a reduced interest rate of 9% p.a. Instead of 12% p.a.
- The due date for issuing notices of notice, intimation, order, and investment in tax saving instruments for rollover benefit of capital gains under Income Tax has been extended to 30th June, 2020
GST – For those who are registered under the GST structure:
- The due date for filing GST returns for February, March, and April have been extended till the last week of June, 2020 for those whose turnover is below 5 crores
- Waiving off of interest, late fee, and penalty for companies whose turnover is below 5 crores
- Interests for companies whose turnover is below 5 crores will be charged at a reduced rate of 9% p.a. instead of 18% p.a. Moreover, late fees and penalties will also be waived off in case there is compliance before June 30th, 2020
- The due date for filing Annual Return for financial year 2018-19 has been extended to 30th June, 2020 from 31st March, 2020
- The due date for filing CMP 08 for composition tax payers has been extended to 30th June, 2020 from 18th April, 2020
- The due date for registering for the composition scheme has been extended to 30th June, 2020 from 31st March, 2020.
Corporate Affairs – These are applicable for Private Limited, OPC, and LLP:
- Waiving off of additional fee charged for late filing during a moratorium period, which is 1st April, 2020 to 30th September, 2020 for any document, return, statement, filed in the MCA system
- Additional time of 6 months offered for newly incorporated companies for declaration of business commencement with the help of Form 20A.
- Company directors who don’t comply with the minimum residency requirement of 182 days shall not be considered as a violation
- The applicability of CARO-20 has been shifted financial year 2020-21
- The compulsory requirement of holding board meetings shall be extended to a 60-day period for the following 2 quarters. I.e. till 30th September, 2020
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.
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