Businesses in India May Have to Reflect COVID-19 Impact in Accounts, Say Auditors

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  • Firms in India may have to state the impact of coronavirus (COVID-19) related shutdowns and disruptions in their financial statements.
  • Some of the issues companies could face during the COVID-19 outbreak include impairment resulting from financial losses, breach in bank agreements, and the ‘impact on the company as a going concern’.
  • Auditors are awaiting guidelines from the Institute of Chartered Accounts of India (ICAI), otherwise they will have to take a call if a company’s loss or dip in profits is due to the COVID-19 outbreak.

The coronavirus outbreak (COVID-19) has already impacted several industries in India, and now auditors say that companies in India may have to reflect the impact of COVID-19 related shutdowns and disruptions on their business operations in their financial statements.

Experts say that since there is no understanding of how long the pandemic will last, there is no way of knowing how much it will impact businesses. Therefore, auditors will have to exercise their judgment while working on financial statements and audits during this time.

Meanwhile, auditors anticipate that some of the issues companies could face amid the outbreak could include impairment resulting from financial losses, breach in bank covenants, and the ‘impact on the company as a going concern’. Going concern is an accounting term for when a company has all the resources needed to continue operating indefinitely. A company is no longer a going concern when it has liquidated all its assets and is bankrupt.  

According to a media report published March 16, since the disruptions in India arose after December 31, 2019, companies in India need to account for any changes – as a non-adjusting post balance sheet event. Non-adjusting events are referred to those conditions that occur after the end of the reporting period and do not result in adjustment to the financial statements.

The media report further adds that, “any entity shall disclose the nature of the event, an estimate of its financial effect or a statement that such a financial effect cannot be made for each material category of non-adjusting event after the reporting period.”

Since the reporting period is October-December 2019 for most companies in India, they will have to declare the impact of COVID-19 disruption in the next quarter.

Further, audit firms say that if there is a significant impact on a company’s economic activities and financial statements due to COVID-19, then an assessment must be conducted to check if the entity can continue as a going concern.

With no guidelines in place for these circumstances, auditors will have to take a call if a company’s loss or dip in profits is due to the outbreak. However, the exact impact on the company is expected to be assessed in the coming quarters.

It is reported that the Institute of Chartered Accountants of India (ICAI) is planning to issue guidelines for auditors after they conduct discussions with the corporate affairs ministry. While there is sufficient time to audit the books, regulators in India may have to provide certain relaxations if COVID-19 impacts audit and finalization of accounts.

Foreign firms in India should seek out assistance of local tax and accounting service professionals to understand the impact of COVID-19 on their businesses.

Follow the latest India COVID-19 updates here.

(This article was first published on March 16, 2020 and was last updated on March 20, 2020 to include the latest developments)

 

India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for business support in India.

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