Financial reporting issues as a result of the COVID-19 pandemic
In today’s unprecedented times, there is so much for businesses to consider. While ensuring the health and safety of people is the priority, maintaining the integrity of the economy and financial domain cannot be ignored. Governments across the world are announcing measures to provide significant financial assistance to various industrial sectors and business organisations.
Amid all the uncertainty, there is a crucial need for accurate and reliable financial reporting that can help companies make prudent business decisions. The objective of financial reporting is to help regain trust and financial stability—however, the pandemic has generated challenges in achieving that.
This blog will help aspiring accountants to understand the financial reporting issues as a result of the COVID-19 crisis. Here is a list of major financial reporting issues being faced by businesses and governments across the world.
What are the financial reporting issues cropping up as a result of COVID-19?
While there are a number of key issues in financial reporting globally, the following issues are the ones that should be prioritised.
Uncertainties concerning cash flow
The most important determinant in the management of a business during a lockdown or a pandemic is the cash flow; businesses need to ascertain whether they have sufficient liquid funds to survive for the foreseeable period or not. Since it is difficult to predict the duration of the lockdown, it can be difficult for companies to state with certainty the status of their cash flow while preparing financial statements.
The level of disclosures and financial reporting analysis can depend on the degree of financial impact and the evolving nature of the outbreak. While it is upon individual companies to decide how much of this uncertainty should be reported in their statements, it is often better to make full disclosures.
All companies are required by the law to report their impairments at the end of every financial year. A company asset is considered to be impaired if the company is not able to recover its value by selling it. As a result of the present pandemic, many companies have had to stop production and close manufacturing plants.
These factories and machines are in limbo as they are not usable because of the continuous degradation and they cannot be classified as impaired assets because of the short time-frame. Hence, many companies might face problems in preparing their financial statements as they cannot determine their impaired assets accurately.
Reliable financial reporting can require you to declare all the contracts with third parties and customers, along with their terms, in the financial statements. However, the companies affected by the pandemic are experiencing cash flow disruptions and may have obtained additional financing by modifying the existing debt agreements or contracts. Thus, it can be challenging reporting the modifications and changes to the existing contractual agreements accurately.
In an attempt to diminish the effect of the Coronavirus pandemic, governments across the world have introduced support measures for various industries and MNC giants. These measures include direct subsidies, tax exemptions and reductions, extended periods to pay off taxes or rental reductions and deferrals.
All these measures can have a direct impact on the complexities of financial reporting. The relief measures accepted by your company may fall under different categories and the accounting may be different in every case. Hence, you may not be able to use generalisations that you might have adopted under normal circumstances.
Timely and meaningful financial reporting about the position, performance and the viability of the company as well as the measures taken for financial risk management can protect your company from the negative effects of the imminent economic depression following the pandemic. It can also assure your stakeholders and investors about the stability of the company during the troubled times.
If you want to learn about effective financial reporting, the strategic financial reporting module of the ACCA exam can provide you with an in-depth understanding of the subject. You can also enrol in the online ACCA preparatory course offered by the London School of Business and Finance. The online format allows you to study this subject from the safety of your home.
Click here to learn more about the course.
This article is written by Sweha Hazari and edited by Emma Chadwick.