Financial statements for Indian and multinational companies may have to reflect the impact of the coronavirus-related shutdown and disruptions, if any, on business operations, auditors have said. Practice alerts issued by audit firms to clients and to audit teams internally have focused so far on the impact on financial statements for the year ended December 31, 2019. But auditors say that the same rules will apply to firms for the full fiscal year ending March 2020, and for subsequent quarters.
ET spoke to assurance and audit heads of India’s largest firms who between them audit 60% of the top 1,000 listed companies and nearly 65% of the biggest multinationals.
“While this [coronavirus] will have an impact in the next one or two quarters, companies with strong balance sheets will be able to withstand this. The problem, however, is that no one knows how long this pandemic and its resultant impact on business will last. Auditors have to make judicious calls,” said Sharmila Karve, former audit head of PwC.
Auditors anticipate several significant issues in case of a major damage to business activities. They include impairment resulting from financial losses, breach in bank covenants and the impact on the company as a going concern.
Since much of the virus-related disruptions took place after December last year, companies will now need to revisit their balance sheets and account for these changes, says a top audit firm’s practice alert.
Mostly likely, a majority of Indian companies will find themselves declaring the impact of the coronavirus disruptions in the following two quarters.
Another issue could be whether a company's accounts need to be drawn up keeping in mind its ability to function as a going concern -- an auditing term which indicates a company's resources to continue. “It is necessary to consider whether the events that have occurred after an entity’s December 31, 2019 reporting date in relation to the coronavirus outbreak have caused a significant deterioration in economic conditions for an entity, or have introduced significant uncertainty,” says the alert.
“If so, an assessment is needed on whether this results in significant doubt on the entity’s ability to continue as a going concern,” it adds.
It’s this uncertainty which is making it difficult for auditors to take calls on issues like a going concern.
For instance, two of the country’s biggest automobile manufacturers are unable to roll out their new products in the coming months. “They do not have raw materials required to finish the product and launch the cars,” said the audit head of a firm. “These two companies will see inventory impairment this quarter or next,” he added.
“There could be a significant impact on the financial statements of businesses affected by coronavirus, including disclosures on a going concern, change in estimates used for impairment, fair value assessments at year-end and reporting as a new key audit matter in the auditor’s report,” said Yogesh Sharma, deputy managing partner of BDO India.
The Institute of Chartered Accountants of India (ICAI), the CA body, is also looking to come out with guidelines for auditors on how to offer clarifications in the wake of Covid-19 outbreak.