The Covid 19 pandemic has set in motion unique circumstances before which even the leading organizations with robust contingent measures crumbled. With the World Health Organisation’s declaration of the Covid 19 as a pandemic, governing authorities across the globe started implementing stringent measures. These measures forced more than half of the industrial sectors to bring the shutters down on their operations on a temporary basis. The work from home policy which is seen as the new normal in the business landscape was still not an option for a significant portion of the operation sectors. These sectors took a major hit in terms of their annual turnover. The collective impact of the Covid 19 pandemic on the global business can be witnessed in the forms of deflated assets value, depreciating currency exchange rates, and long-term interest rates going downhill. Understandably, such a distressing economic picture heralded immense challenges for accountants and auditors who have the responsibility of doing financial reporting for companies.

Regulatory authorities have issued mandates for such accountants to work in close quarters with their audit committees to ensure that all the financial statements and the audit processes are in line with the unique circumstances created by the pandemic. This has further added to the pains of the financial accountants. In this article we will delve into the current challenges faced by accountants while doing financial reporting and solutions that can help them alleviate their pain points.

Top Challenges Faced During Financial Reporting

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Going concern assumption- The implementation of safety measures to contain the spread of coronavirus has heralded major disruptions in operations and halted activities across various industrial sectors. Severe decline in demand, thinning sales margin, among others have hit companies hard. The declining economic activity has negatively impacted future earnings, in the near term. In addition, the potential impact of the safety measures can not be measured in any tangible form. This, in turn, has resulted in material uncertainties that inhibited a definitive going concern assumption.

Impairment assessment During assessing impairment, an accountant is expected to determine the assets that can be recovered based on an anticipated influx of capital. This anticipation is again based on management’s estimation of the economic conditions that will promote business. However, the economic uncertainties caused because of the pandemic and the sudden halt on business activities owing to safety measures has made it extremely difficult in assessing impairment. Which sources to tap into for performance benchmarking? The risks of multiple-counting or altogether omitting risk adjustments as impairment pointers, what should be a company’s disclosure obligations? are some of the burning questions and issues faced by accountants during impairment assessment.

Changes on contract termsThe ravages of the Covid 19 pandemic have plugged the potential sources of revenue generation for companies. This has inhibited cash flow leading to higher operational expenditure but lower revenue. To cushion the impact of a diminishing capital, companies are forced to take debts and seek for waivers. In such cases, the financially ailing companies will also have to explore modifications in their existing contract terms or look at a mid-term contract cancellation. Financial institutions are being obligated by governments to provide relief to borrowers by relaxing the loan terms. These forms of contract modifications have exerted negative impact on lenders who are reassessing their loan portfolio and chances of credit loss.

Appropriate estimation of fair value The fair value of an asset should mirror market conditions as it appears at the measurement date. The undulating economic conditions spurred by the Covid 19 pandemic have issued unobservable inputs into the market landscape which has made a fair value measurement of assets difficult. Unobservable inputs do not have market data and values of these inputs are assessed purely on assumptions. Such uncertainties in estimation that is not supported by tangible market data requires an accountant to make significant adjustment in their valuation techniques.

Economic stimulus offered by governments To aid the financially fractured business sectors and masses owing to the pandemic impact, governments across the globe have rolled out economic relief packages. These economic packages offer relief on taxes, introduce subsidies, advise extensions of expiry dates of dormant tax losses, loans with low interest rates to increase cash flow in the economy, reduction in rentals, among others. However, these measures tend to have an impact on financial reporting as accounting for a company that has utilized for at least three of these measures will be fundamentally different.

How to Address the Pandemic-induced Challenges Faced in Financial Reporting?

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Going concern issue redressalGoing concern assessments made by an accountant will be starkly different from the way it was done in the year before the Covid 19 pandemic outbreak. Below listed are some of the steps that a management must fulfil to sum up a financial reporting that is attuned to the unique and unprecedented circumstances enforced by the pandemic:

  • Track and determine what are the principal risks, asset liquidity and solvency risks in particular, posed by the pandemic to a specific business.
  • Relook and redo forecasts on sales, capital, and revenue generation based on the identified risks.
  • Bring major modifications in budget that was done based on market anticipations prior to the pandemic outbreak.
  • Reassess and if required change the sources of finances such as lenders and any other external sources.
  • Relook and redo pre-designed plans to execute operations such as refinancing of existing loans and operation restructuring.
  • Robust measures in place in case of inappropriate disclosures in financial statements.

Addressing issues in impairment assessment Accounting standards will undergo significant changes while doing an impairment review in keeping with the turbulent economic conditions caused by the Covid 19 pandemic. Here are some of the steps that must be run through during an impairment assessment for financial reporting:

  • Identify the factors such as changes in economic health and determine whether the value of a company’s market capitalization is lesser than its net value. These factors are considered to trigger impairment of assets.
  • Reflect on factors that will create obstacle for a perennial capital influx in a company. Factors such as restrictions on transport fracturing the supply chain, thereby affecting the ability to meet demand, commodity price volatility, changes in working capital leading to liquidity of assets, are crucial and must be considered while revisiting cash flow forecasting.
  • Relooking at the necessity of updating discount rates in keeping with the uncertain economic conditions at the financial reporting date. Exploring the necessity of including risk premiums to keep forecasting inputs more reflective of the current economic uncertainties.
  • Work on sensitivity disclosures about the crucial management assumptions and the primary sources of uncertainties in estimation in annual and interim financial reports. Judicially determine the extent of sensitive disclosure in keeping with the Covid 19 impacts on business operations.

Addressing changes in contract termsThe onus lies on the management to determine the most pertinent accounting model to be applied during instances of contract term changes. It must be explained in a clear manner about the relief offered by the FASB staff that apply to changes incorporated in lease arrangements. Adequate description of impacts on financial reporting is imperative following changes made on a contract in the form of a loan, employee contract, lease arrangement, employee agreement, client contract, among others. Disclosures and other aspects of contract changes must be clearly described.

Redressal of fair value estimation challenges At the backdrop of the debilitating impacts of Covid 19, an attempt towards fair valuation must consider factor in the following:

  • Assumptions made by participants in the market that are based on market data reflecting the prevailing conditions at the measurement date
  • Consider capitalizing on the pertinent observable inputs. On the other hand, minimize the use of unobservable inputs whenever possible provided that the observable inputs reflect the prevailing market conditions.
  • Assess the level of significance gained by unobservable inputs which would  the fact that Consider whether unobservable inputs have become significant, which would result in a Level 3 categorisation in the fair value scale and will subsequently entail additional disclosures.
  • Include risk premiums that are the offshoots of the looming economic uncertainty and other economic impacts caused by the Covid 19 pandemic.
  • Widen the scopes of disclosures to cover crucial market assumptions about the sources that can set forth a fresh bout of fair value estimation uncertainties.

Addressing challenges caused by government’s stimulus packagesWhile accounting for any impacts made on income tax scenario after a company leverages government’s economic relief packages, it is crucial to determine whether the particular government has fulfilled the relevant regulations while disbursing the packages. The onus is on the management to find out whether modifications made on tax rates were incorporated as of the reporting date. The aspects of relaxations done on taxes and enlargement of rebates should be measured to determine to know if they should be considered as a source of minimization of income tax expense.

Parting note

There is no doubting the fact that economic impetus provided by governments, anticipations of release of a coronavirus vaccine, readjustment of the operational models done on a war footing have collectively led the wheel of the global economy start rolling but the worse isn’t over yet. With another wave of infection hitting Europe, Canada, and other major business hubs, chances are the global business scenario may go on a backfoot again. The sheer inability to map the progress of this disease and its possible impact on the economy releases fresh bouts of complexities for managements who aim at stable market conditions to create an all-inclusive and appropriate financial reporting. In such an unpredictable and precarious situation, it is prudent of managements to outsource insurance reporting services. Vendors offering insurance reporting services are expected to harbor a team of domain experts who not only adept with the nitty gritty of financial reporting functions but also stay on the top of dynamics that are changing the behavior of the market on a regular basis.

Who we are and Why Should you Trust us?

This article is authored by experts at Insurance Backoffice Pro, a trusted name to outsource insurance reporting services. We have about a decade-long experience and expertise in providing robust reporting services to Fortune 500 enterprises. We have a team of insurance experts who are well versed with accounting functions. Our experts create reports to provide an accurate picture of your business performance that are executed by means of a range of gold-standard industry applications. We have the requisite expertise to generate accurate balance sheets and provide you a verified documents portfolio to reveal data on the profit and loss for a certain period. We leverage robust data analytics tools to provide you with actionable insights into your business accounts to streamline your operations to drive your prospects of revenue generation.