This blog is written by Mr. Daniyal Naeem. Please read this blog and provide your valued comments
ACCOUNTING IMPLICATIONS OF THE IMPACTS OF COVID – 19
The World Health Organization proclaimed Corona Virus (COVID-19) to be a general wellbeing crisis on January 30, 2020. As at March 31, 2020, nearly the entire of Pakistan is in some condition of lock down. The administrative and commonplace governments and other unifying units have actualized different measures to contain the spread of the COVID – 19, including limiting the flight activities at the air terminals, abridging intercity developments through transports and prepares, transitory shutting of organizations, schools and so on.
On March 31, 2020, the Pakistan Stock Exchange (PSX) 100 index shut down at 29,231 points and the index has shed more than 27% from December 31, 2019. Further the interpretation pace of USD/PKR shut at Rs 166+. Huge numbers of the recorded substances working in material, concrete, synthetic compounds, steel and other areas have offered notification to the Pakistan Stock Exchange for transitory suspension of their tasks.
Effects, for example, business and creation disturbances, gracefully chain interferences, unpredictability in the value and obligation markets, decreased income and incomes and other monetary outcomes additionally have bookkeeping and monetary ramifications. While this archive centers around issues that are probably going to be the most oftentimes experienced, numerous others are sure to emerge. As the circumstance keeps on developing, so too will the significant bookkeeping issues. Thus, coming up next isn’t a thorough rundown of all important bookkeeping contemplations;
- Going Concern
- Revenue Recognition
- Property Plant and Equipment
- Income Taxes
Under IAS 1 ‘Presentation of Financial Statements’, the management is needed to survey an element’s capacity to proceed as a going concern. Substances are additionally needed to reveal material vulnerabilities identified with occasions or conditions that may provide reason to feel ambiguous about critical their capacity to proceed as a going concern. The norms necessitate that all accessible data about the future, which is in any event, yet not restricted to, a year from the finish of the detailing time frame, ought to be considered while evaluating whether the going concern supposition that is suitable.
The effects of the COVID – 19 have just raised worries for some elements and some have as of now reported brief suspension of activities and cutbacks. While setting up the fiscal summaries, the board should;
- Think about the expected ramifications of the COVID – 19, including measures taken by the government and banks in its appraisal of going concern; and
- Consider updating the financial plans and conjectures arranged for the current year. By and large, 2020 financial plans and gauges arranged in 2019 may now be of restricted pertinence given the quickly changing financial and business conditions and may require huge update.
The executives ought to likewise consider whether they are required to unveil the effects of the COVID – 19 as material vulnerabilities that may give occasion to feel qualms about critical a substance’s capacity to proceed as going concern. The executives ought to additionally recall that occasions after the revealing date that demonstrate a substance is not, at this point a going concern are consistently changing occasions.
IFRS 16 – “Leases” became effective from January 1, 2019 in Pakistan and by and large had a huge effect on the resident’s representing lease contracts whereby Right of Use Assets and Lease Obligation were recorded for all leases under the extent of IFRS 16 (regardless of whether money or working leases). The reception of this standard requires critical administration judgment in the assurance of rent term for example regardless of whether augmentation or end choices accessible to the tenant are probably going to be worked out furthermore, substances needed to practice judgment dependent on their business needs to survey the probability of practicing these choices. Further, judgment was additionally needed in assessment of the gradual getting pace of the resident (IBR) relevant on progress date. Because of the COVID – 19 flare-up, the presumptions utilized on December 31, 2019 may at this point don’t hold legitimate. These effects are further examined underneath:
Reassessment of lease term:
Because of the impacts of the COVID – 19, the progressions in the board’s aim for augmentations/end lease term could significantly affect the conveying measure of lease resources (right of utilization resources) and liabilities. Further, lease contracts with purchase choices may should be reconsidered if the renter finished up at first that activity of the buy alternative was sensibly sure. In the event that a tenant changes its evaluation of regardless of whether it is sensibly sure to practice a restoration or buy alternative, or not to practice a choice to end the rent early, at that point the rent risk is re-estimated utilizing an updated markdown rate with the relating acclimations to right-of- use resources. This thus will affect the sum and profile of devaluation and interest cost perceived accordingly.
Modification of lease:
On March 28, 2020, one of the greatest land the board organizations in Karachi declared that as a component of help to its inhabitants, it is forgoing the lease for the long stretch of April 2020 alongside certain other waivers. Comparative circumstances can likewise emerge with different substances whereby a lessor and a renter might renegotiate the provisions of a rent because of the COVID-19 or a lessor may give a renter a concession regarding lease installments.
Lessees should, hence, consider the prerequisites of IFRS 16 “Leases” and whether the concession ought to be represented as a lease modification and spread over the excess time of the lease. The adjustment of the lease requires the re-measurement of the rent obligation utilizing a modified markdown rate.
Impairment considerations for lessors:
If there should arise an occurrence of working leases, a lessor remembers the hidden rented resource for the conveying measure of the CGU and applies IAS 36 for surveying the disability thereof. While evaluating the recoverable worth, the lessor incorporates the future money receipts in its income conjectures and distinguishes whether any disability should be perceived.
What’s more, a substance applies IFRS 9 to test working and financing lease receivables for anticipated credit misfortunes. Kindly allude to ECL direction on IFRS 9 and comparative contemplations as given in this distribution.
An entity’s sales and income may decrease because of the diminished monetary movement following the steps taken to control the COVID – 19. There is a brief lockdown in the nation because of which numerous plants/units have been closed down, bringing about interruption in supply and demand of merchandise.
The COVID-19 outbreak might affect revenue estimates for ongoing and future contracts with customers falling within the scope of “IFRS 15 – Revenue from Contracts with Customers”. Consequently, there could be an effect on the assumptions made by management in measuring the revenue from goods or services already delivered and in particular on the measurement of variable considerations. Management should, therefore, reconsider both its estimate of variable consideration and whether the revenue recognition threshold is met by exercising significant judgement.
IFRS 15 requires an entity to unveil data that permits clients to comprehend the nature, sum, timing and vulnerability of incomes emerging from income. Administrations ought to consider revealing data about the strategies, information sources and suspicions utilized for assessing variable thought furthermore, evaluating whether a gauge of variable thought is compelled.
Assessment of ongoing customer contracts for enforceability, impairment and modification
IFRS 15 is applied distinctly to those agreements where the executives anticipate that its client should meet its commitments as they fall due. The executives may decide to keep on providing a client in any event, when it knows that the client probably won’t have the option to pay for a few or all the products being provided. Income is perceived in these conditions just when it is likely that the client will pay the exchange cost when it is expected net of any value concession.
The management should assess the need for write-offs or increase in ECL allowance on outstanding receivable balances under the requirements of IFRS 9.
Impairment under IAS 36:
IAS 36 “Impairment of Assets” requires an element to survey, toward the finish of each revealing period, regardless of whether there is any impairment for a substance’s non-money related resources. For altruism and theoretical resources with inconclusive helpful carries on with, the standard requires a yearly hindrance test and when markers of impairment exist. For different classes of resources inside the extent of the norm, a substance is needed to evaluate at each revealing date whether there are any signs of impairment. The impairment test must be done just if there are such signs.
The effect of decreased financial movement, lock downs and lower incomes are probably going to influence numerous substances and may likewise show hindrance. Thusly, elements ought to evaluate for each of their non-monetary resources, where there is a pointer of debilitation, for example, fall of stock and product costs, producing plant closures, shop terminations, marked down interest and selling costs for products and administrations, and so on in circumstances where an element has closed the presence of impedance markers and has chosen to do the evaluation of recoverable worth dependent on esteem being used, the administration ought to think about whether:
- the suspicions and income estimates used to test for impairment ought to be refreshed to mirror the possible effects of the COVID-19;
- a normal income approach may be a superior approach to gauge recoverable sum than a solitary anticipated result to catch the expanded danger and vulnerability; and
- the variables used to decide the rebate rate, anyway the recoverable sum is decided, ought to be modified to mirror the effect of the COVID – 19 and the measures taken to control it. The executives ought to guarantee that fitting danger is reflected in either the money streams or the rebate rate.
Where the recoverable amounts are based on fair value less cost to sell, the specific considerations have been discussed later in this document.
The board ought to likewise think about explicitly the exposure prerequisites under IAS 36 to uncover suspicions and sensitivities with regards to testing altruism and theoretical resources having an inconclusive life. The exposure necessities for other non-money related resources is pertinent just when a disability is recorded thereof. Explicit thought should likewise be given to the assessment vulnerability with regards to the COVID – 19.
It very well may be important to record inventories to net realizable value. These compose downs could be because of diminished development in stock, lower ware costs, or stock oldness because of lower than anticipated deals.
IAS 2 Inventories necessitates that fixed creation overheads are remembered for the expense of stock in view of ordinary creation limit. Decreased creation may influence the degree to which overheads can be remembered for the expense of stock.
Entities should assess the significance of any write-downs and whether they require disclosure in accordance with IAS 2.
Property Plant and Equipment:
The COVID – 19 may imply that property, plant and hardware is under-used or not used for a period or that capital tasks are suspended. IAS 16 Property, plant and hardware necessitates that deterioration proceeds to be charged in the assertion of benefit or misfortune while a resource is incidentally inert (except if a utilization based deterioration strategy is utilized such as quantities of hours or units delivered).
IAS 23 Borrowing costs requires that the capitalization of interest is suspended when development of an asset is suspended.
The COVID – 19 situation could affect future profits as a result of direct and indirect (effect on customers, suppliers, service providers) factors.
Asset impairment may likewise diminish the measure of conceded charge liabilities and/or make extra deductible impermanent contrasts. Substances with conceded charge resources ought to rethink estimate benefits and the recoverability of conceded charge resources as per “IAS 12 Income taxes” considering the extra vulnerability emerging from the COVID – 19 and the means taken to control it.
There are vulnerabilities around the COVID – 19 and substances may discover them hard to foresee the impacts of the COVID – 19 on the future determined benefits. Substances ought to consider revealing potential effects of the COVID – 19 and the danger factors underneath fiscal reports notes where such assessment resources or then again liabilities are perceived. The board ought to reveal any huge decisions and assessments made in evaluating the recoverability of conceded charge resources, as per IAS 1.
Right now, no tax relieve package other than for construction industry has been reported by the administration of Pakistan because of the COVID – 19. Nonetheless, going ahead if any tax relieve package is reported then the effect of that on the current and conceded charge adjusts would be recorded in the money related period in which the revising enactment would be considerably sanctioned. Elements would additionally need to consider if the expense concessions are lurched more than quite a while. In such cases gradual charge rate decreases and the normal planning of the inversion of conceded charge adjusts will likewise should be evaluated
November 23, 2020