Covid-19
The COVID-19 pandemic, also known as the coronavirus pandemic, is the 2019 global coronavirus disease (COVID-19) pandemic caused by the severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). As from the previous blog, we have talked about 5 areas that are affected by the pandemic, PPE, Receivables, Inventories, Bank & Cash, and loans. You may read the previous blog at What are the implications of Covid-19 on your company's account? Part 1. Now we will continue discussing the remaining areas of accounting that are affected.
Areas of accounting that will be affected by COVID-19
f) Capital
Due to the pandemic, most businesses are facing issues in maintaining their profit especially the service industries. Most of them will have reduced sales and are forced to use capital fundings in order to go through this pandemic. This will directly cause the erosion of capital, companies will need to assess their ability to continue their operations as a going concern.
g) Revenue
Sectors like transportation, retail, hospitality, manufacturing, and services organization's revenue are being hit by a major downfall in the pandemic as many of the businesses require face-to-face contact with clients. With a major downfall in their revenues, companies will need to focus on their ability to sustain their business as there are no certainties on when the pandemic will end, companies will need to properly manage their liquidity. Companies might need to reassess their ability to continue their operations as a going concern.
h) Other income statement items
The pandemic will also cause a significant drop in business volume resulting in over-capacity, it will cause provision for onerous contracts, write-off of excess overheads and etc. A provision is required when the costs of meeting the obligations exceed the benefits expected to be received in a contract. Companies will need to assess the adequacy of provisions and write-offs in order to increase the sustainability of the business.
i) Investments
The pandemic has also caused most investments to drop in market value. For example, it has disrupted the flows of foreign direct investments, the International Monetary Fund announced that investors had removed 83 billion US$ from developing countries since the beginning of the COVID-19 crisis, the largest capital outflow ever recorded. According to the UN Conference on Trade and Development (UNCTAD), global foreign direct investment (FDI) flows are expected to contract between 30 percent to 40 percent in 2020/21. All sectors will be affected. Sharp contractions in FDI are especially evident in consumer and cyclical sectors, such as airlines, hotels, restaurants, and leisure, as well as manufacturing industries and the energy sector. This will directly affect the impairment costs in the financial statements. Companies will need to write down their latest market value.
j) Subsequent events
No one knows when will the pandemic end, what we are able to do right now is to predict and prepare ourselves for the drastic changes in the business environment after the pandemic. Companies will need to assess whether the environment after the pandemic is an adjusting or non-adjusting event.
Here are some related topics in the TreezSoft blog for your further readings:
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