Covid-19
The COVID-19 pandemic, also known as the coronavirus pandemic, is a global pandemic caused by coronavirus 2 that causes severe acute respiratory syndrome (SARS-CoV-2). In December of 2019, the virus was initially detected in Wuhan, China. On January 30th, 2020, the World Health Organization proclaimed COVID-19 a public health emergency of international significance, and on March 11, 2020, it was declared a pandemic. COVID-19 had more than 152 million confirmed cases as of May 3, 2021, causing 1 million fatalities, making it one of the worst pandemics in human history.
COVID-19 is also a global pandemic and public health disaster that significantly impacted the global economy and financial markets. The disease has caused a severe drop in income, growing unemployment, and interruptions in transportation, services, and manufacturing industry in many countries including Malaysia.
The financial and economic volatility that was caused by Covid-19 has a direct impact on the preparation of financial statements in significant ways. Several areas in accounting will be affected and we will discuss them in this blog. This blog will be split into 2 parts, you may continue reading the 2nd part here. For now, let's find out what are areas of accounting are affected.
Areas of accounting that will be affected by COVID-19
a) PPE
Property, plant, and equipment (PP&E) are long-term assets vital to business operations and not easily converted into cash. Property, plant, and equipment are tangible assets, meaning they are physical in nature or can be touched. For a period of time, the pandemic will result in unused or underutilized property, plant, and equipment, especially if capital investments are halted. Depreciation of property, plant, and equipment will continue to be deducted in the income statement even if assets are temporarily inactive. The auditor must look for signs of impairment, changes in key drivers, and assumptions used in calculating the recoverable amount of productive assets and update key drivers and assumptions in valuation procedures to reflect current market circumstances at the reporting date.
b) Receivables
Companies tend to be more lenient with accounts receivable when the economy is doing well, interest rates are low, and cash flow is not an issue. However, when the supply chain is impacted, cash flow management becomes a crucial thing. It's worth taking a deeper look at how you manage your accounts receivable. Customers will postpone payments as much as possible during the pandemic because their business may be affected as well. This is why it's critical to improve the collection process rigorously. You can focus on customer-specific payment performance and identify companies that may be changing their payment practices. You will also need to go back to the basics, such as issuing invoices in a timely and accurate manner. Payments may be delayed if there are any issues in your company's billing process. This could also result in a rise in bad debts on the balance sheet. Auditors must determine the number of bad debts and credit loss provisions, which will facilitate processes. Auditors may consider doing early and proactive engagement with customers, for example, shorten payment terms for discounts, debtor financing, and factoring payment.
c) Inventories
The company is at risk of having its supply chain disrupted owing to a shortage of raw materials, economic downturn, or a variety of other factors caused by the pandemic. Inventory safety stock criteria will certainly need to be modified to account for the increased volatility in demand and supply, and inventory may need to be written down to net realizable value. These write-downs could be due to reduced movement in inventory, lower commodity prices, or inventory obsolescence due to lower than expected sales. The auditors will also need to track changes in net realizable value as a result of lower or outmoded selling prices. To reduce work-in-progress, you can consider offering discounts on slow-moving or obsolete inventory and removing production bottlenecks.
d) Bank & cash
The food and beverage industry, as well as hotels and tourism, are among the worst hit by the lockdown. Even if their revenues plummet, they must continue to pay rent and employee salaries to keep the business afloat. As a result, their banking and cash liquidity will decrease, and it is not possible to predict when the pandemic will cease. Auditors will need to assess whether the company has the ability to continue its operations. Businesses might need to diversify their portfolio of business into sectors that are still earning during the pandemic.
e) Loans
Because of the virus's financial impact, some businesses may break their borrowing contracts or make significant adjustments to the conditions. As a result, loan repayment terms may change, and some loans may be returned on demand. The auditor should assess if the business's classification of loans and other financing liabilities between non-current and current is impacted, and whether the entity can continue operating in extreme circumstances. Auditors should consider particularly the impact of any cross-default clauses. Auditors should also take into account the impact of any changes in borrowing terms as a result of the aforementioned situations, and classify waivers obtained after the reporting date as non-adjusting events. This has an impact on the ability of the company to continue to function as an ongoing concern.
You can refer to the blogs below to read more on how TreezSoft cloud accounting helps startups.
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