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COVID-19 affects companies’ financial reporting - Daily News Egypt

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COVID-19 affects companies’ financial reporting

Entities  need to estimate economic impact of pandemic either positive or negative on their businesses, says ProHouse Consultancies


The ongoing coronavirus (COVID-19) pandemic is likely to have a significant impact on companies’ financial reporting, according to Dubai-based accountancy services company, ProHouse Consultancies.

In a recent report by the company, they also shed light on the effects of the virus on the financial resources of companies and entities

As the coronavirus outbreak extended its global grip in the first quarter (1Q) of 2020, entities will be required to estimate economic impacts on their business and finances, whether positive or negative.

ProHouse Consultancies also said that entities are required to estimate the expected credit losses for a period of 12 months or a lifetime, depending on the nature of the financial instrument.

It added that the entities should assess whether the credit risk on a financial instrument has increased significantly since the initial recognition. If there is a significant increase in the credit risk, entities are generally required to recognise a loss amount equal to the expected lifetime of credit losses.

“Entities that apply property rights in accounting for joint ventures or sister companies that have a significant influence on the investing entities, may need to assess the effect of the pandemic on its investments and determine whether there is an indication of impairment,” the company said.

 The company also said that, due to the virus outbreak and the commensurate government actions and measures, it is likely that the net recoverable value of inventories will decrease due to lower demand or lower commodity prices.

It added that the virus has affected the creditworthiness of customers, so entities should analyse the revenue recognition standard more accurately. Entities should also obtain evidence to support or confirm the potential collection at the appointed times.

The report added that entities significantly affected by the coronavirus may be forced to reduce their workforce. They may also be forced to close some business sites, restructure, or sell or dispose of a group of assets should the impacts be particularly significant.

Cash flows have been significantly affected by the ongoing virus pandemic, meaning entities may resort to amending loan agreements and financial covenants, or obtaining exemptions from debt pledges.

“Entities are required to disclose their exposure to financial risks, such as credit, liquidity and market risk, and how they should be managed. They should also consider whether COVID-19 has affected their plans for risk exposure and mitigation,” the report said. “The coronavirus has an impact on the cost of non-financial assets valuations and, hence, expected cash flows. Also the current investments may face lower interest rate due to the risk and changes in market liquidity.”

It mentioned that some entities maintain insurance coverage for business disturbances or loss of profits, while insurance entitlements should not be recognised except at the point where the receipt of the consideration is almost certain.

“We believe that the achievement of the “near certainty” principle usually will not be available to most entities unless insurance companies note their intention to pay the claim,” the company said.

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https://dailyfeed.dailynewsegypt.com/2020/04/20/covid-19-affects-companies-financial-reporting/
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