Accounting for coronavirus impact: Here're key challenges faced by auditors

At a time when most companies are scrambling to generate year-end financial statements and match their accounts, the ominous impact of the coronavirus outbreak on businesses has sent accountants and auditors into a tizzy.

The key challenge, say experts, is to capture the potential financial impact and implications on assets, liabilities, and results — both present and future. The other is to provide appropriate disclosure for various stakeholders in an evolving business scenario, they add.

Businesses which are dependent on supply from China or have exposure to the Chinese market are the worst affected. “All investment, loan and assets connected with China may have to be additionally tested for impairment,” says Milan Mody, partner, NA Shah Associates.

On the liability front, commitment, obligation and damages because of inability to supply due to non-receipt of material from China also need to be provided for, he adds.

“Indian companies having presence in the affected markets may need to evaluate their liquidity or funding requirements, as there may be stress on recoverability of inventories and receivables, settlement of trade and employee liabilities, and possible claims and contingencies,” says Govind Ahuja, partner and professional practice director, assurance services, S R Batliboi & Associates.

According to M P Vijay Kumar, chief financial officer, Sify Technologies, most Indian entities with exposure to China have started using the force majeure clause to protect themselves from any claims.

Over the years, financial regulators across countries have been proactive in issuing guidance on key national or global events with a possible adverse impact on financial statements or audit of those financial statements. The US’ Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB), and the UK’s Financial Reporting Council have had several rounds of discussions with auditors and other stakeholders on how to factor in the impact of the latest virus outbreak on financial statements. They have offered guidance to companies and auditors to proactively monitor the impact on financial statements and issue appropriate disclosures to all stakeholders from time to time. These regulators are also open to the idea of giving specific relief to companies on a case-by-case basis.

According to Mody, a key regulatory concern is inappropriate and non-uniform reporting by firms on the impact of coronavirus on their businesses, possible impact, and disclosures around risk assessment.

Mody is of the view that Indian regulators should issue guidance to auditors on common issues, along with uniformity of approach and reporting. “Dialogues with the Securities and Exchange Board of India (Sebi) and stock exchanges will result in clarity on timelines for the submission of consolidated financial statements,” he says.

Vijay Kumar feels boards of companies, which are impacted significantly, should proactively communicate to their investors and bankers. “Timely communication is received positively by all stakeholders.” 

He is, however, not in favour of giving companies extra time for the submission of consolidated financial statements, except in cases where there are subsidiaries/ associates or JVs in coronavirus-hit countries.