Financial Reporting Implications of COVID-19

The COVID-19 pandemic has adversely affected the global economy. All businesses and organizations have been affected by this crisis in one way or another. While companies are trying their best to design effective strategies to smoothly run their business in these new conditions, there is mounting pressure from investors and stakeholders for complete financial transparency and information. Not every enterprise is able to perform sustainability reporting internally in such difficult times, and therefore accounting firms in Malaysia are helping organizations to maintain financial transparency.

Tax regulators, registration authorities and audit and accounting firms have adopted modern tools and technology to help organizations and are guiding them through the process of sustainability reporting. There are five major financial reporting implications of COVID-19:

1.    Liquidation and Going Concern

Investors and the management of the majority of businesses are understandably concerned about the survival of companies in these harsh financial conditions. A major concern is that due to low sales and investment, businesses will not have enough cash to survive in the next few months, or for even a year until the COVID-19 vaccine is produced and things start getting back to normal.

During sustainability reporting and preparing accurate financial statements, accounting firms have to assess the organization’s ability to continue as a going concern. Due to the COVID-19 pandemic, assumptions about going concerns and future predictions will also have to be modified for the accurate financial assessment of a company. Accounting firms will have to consider the current and anticipated impact of the coronavirus on businesses. All of the assumptions, uncertainties and predictions must be made a part of the sustainable report.

2.    Impairment assessment

An impaired asset is the one whose values is irrecoverable by the company, either by selling it or using it in future projects. Impairment assessment is a critical part of sustainability reporting. It means that every company must assess the impairment of their nonfinancial assets at the end of the reporting.

Due to the coronavirus outbreak, many businesses have to shut down their manufacturing plants temporarily. Similarly, there are strict travelling, import/export and working guidelines which have led to a decline in business for the majority of industries, which could be considered a sign of impairment.

To generate an accurate financial report during the COVID-19 crisis, organizations should find out their assets’ recoverable amount, which is the combination of the estimated future cash flow and variations in cash flow. The predicted cash flow will indicate the company’s estimate of the economic conditions that will prevail throughout the asset’s life. Uncertain economic conditions, like in this pandemic, will make forecasting cash flows quite challenging. Companies need to release complete information and the evidence they use to predict future cash flow.

group of businesspeople in the meeting

3.    Changes in Legal Agreements

No one could have predicted the COVID-19 pandemic and the economic destruction it has brought for many companies. Businesses are facing many cash flow challenges due to disrupted supply-chain, temporarily closing down of factories, a sharp increase in operating costs and lack of revenue.  Many organizations need additional financing to survive in the market. As a result, accounting firms in Malaysia must help organizations to conduct a thorough sustainability reporting and check if there is a need for making any changes in the legal agreement to obtain financing.

4.    Measuring Fair Value

As part of sustainability reporting, organizations are required to measure a few of their assets and liabilities at fair value. It is an estimated exit price based on the assumptions about prevailing market conditions.

During fair value measurement, accounting and audit firms should make use of both the known and unknown factors of market conditions.  The impact of the evaluation is dependent upon the severity of the COVID-19 pandemic on your company and overall market conditions. Since there is a lot of uncertainty involved, firms will have to mention all the assumptions made and evidence used to measure the fair value in the sustainability report.

5.    Tax Incentives

The government and tax authorities are trying to mitigate the impact of the coronavirus on the economy by helping businesses through with relief packages, tax incentives, direct subsidies, minimum public levies, rental reductions and low-interest loans. An experienced and qualified accounting firm in Malaysia will be aware of such measures applicable to specific companies and can help organizations in guiding them towards such schemes. They have implications in financial reporting as well. Firms must show all the relief measures utilized by organizations.

Bank Negara Malaysia

In a Nutshell

The whole world is going through turbulent times as the COVID-19 pandemic has disturbed the whole structure of the world. Undoubtedly, many companies are suffering due to the worsening economy and their investors are also getting anxious. A transparent and thorough sustainability report can play a vital role in bridging the communication gap between companies and their investors. It can also help stakeholders maintain trust in the business and collectively overcome this crisis. For more information, feel free to get in touch with us.

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