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What must Accountants do to handle Clients while dealing with the Impact of COVID-19

Businesses will have a hard time in figuring out the best strategies for restructuring operations until accountants come to the rescue and start compartmentalising finances.

Accountants-dealing-with-the-Impact -of-COVID-19

According to Deloitte, accountants will first have to identify the affected zones. The following are the areas that would be generally affected due to a nationwide lockdown.

  • Production
  • Disruption in supply chain
  • Decline in demand and revenue loss
  • Unavailability of employees
  • Disruptions in plans on future investments
  • Inability to sell shares
  • Current financial instruments which may become volatile
  • Complete disruption in the worst hit sectors such as travel, tourism and hospitality and their impact
  • Global financial markets affecting business risk exposure
  • The next steps entail the analysis of the affected areas and restructuring a model based on financial condition on the reporting date before the lockdown and speculation of how conditions would be on the next reporting date keeping in mind government and RBI regulations that would influence or provide relaxation to processes. Accountants would have to be transparent about financial restructuring as a respond to COVID-19 and its overall impact on the business (positive or negative). This includes

  • Hedging considerations
  • Insurance claims
  • Employee termination benefits
  • Tax considerations (if any)
  • Relaxation in contractual arrangement affecting cash outflow
  • Acquirements of goods or services in exchange of equity-based payments
  • Variables like customer rebates or refunds received from suppliers, commissions etc
  • Apart from that here is a list of the ad hoc responsibilities that accountants must take care of in response to the disruptions caused by the nationwide lockdown.

    Liquidity Management

    Informing businesses on alternative sources of liquidity management including reverse factoring, early settlement of trade receivables on a discount, deferring due payments to suppliers, selling financial assets and the likes, and maintaining a transparency of such cash flows on the balance sheet.

    Restructuring

    Businesses will be susceptible to downsizing or closure of operations during a crisis. Accountants must be at the helm of affairs while ensuring a formal and detailed restructuring plan validated by financial evidence.

    Continuity

    Unless the company is dissolved, accounting reports will be prepared on a going concern basis. This might include writing off sales that have a high probability of being closed within a year. The going concern would be a summary of events that have caused disruptions after the last reporting date before COVID-19.

    Identifying Onerous Contracts

    The costs of fulfilling obligations might supersede the benefits due to the disruptions thus caused. Accountants must distinguish these onerous contracts.

    Covenant dues and their impact

    Companies may fail to pay financial covenants. However, during a crises governments and regulatory bodies introduce financial reforms to provide certain relaxation to borrowers. Accountants must determine breeches of covenants in the light of new measures that will affect the loans in the long term.

    Non-financial assets including Level 3 assets

    Non-financial and level 3 assets will stand a high chance of becoming impaired. Accountants must run impairment tests during each reporting period, and more so when there is already a crisis. Determining an impairment would be based on the estimation of the market in which the company operates and the way in which the asset was determined to be used or is going to be restructured eventually.

    Inventory valuation

    Not only will the calculation of net realisable value face difficulties with a new set of challenges, the costing of inventories will also have to be re-evaluated if production level dips dramatically.

    Adjustments in Credit Loss Allowance

    Estimated losses would form a crucial part of accounting as the lockdown will impact the ability of buyers to pay. A speculation of negative growth will increase the size of defaults. In this scenario, according to Deloitte, Allowance for Expected credit losses should be unbiased in weighing the possible outcomes. The time value of money must be determined. The exercise should be reinforced by solely the information and supporting data available on the reporting date.

    During COVID-19, Accountants are the front-liners in terms of diagnosing and reporting business health and, therefore, cannot be limited in their operations, even less so by the weight of a desktop or server-based software which is antithetical to collaborative functioning forming the crux of a work from home/remote set up. This is not the best time to deal with time-consuming maintenance, a possible downtime or waiting for an approval to access data remotely through a special provision. A cloud-based accounting software provides a secure environment for the data by means of a simple log in. The primary user can provide access to other users and collaborate remotely, and at the same time control the level of access for each user. No downtime is incurred while switching operations from one place to another. The server is remote, so a support team works throughout office hours to ensure smooth operations. Maximum productivity can be gained through automation owing to better integration with Bank, GST portal, analytics, end users, businesses etc.