CRITICAL ANALYSIS

ON
THE FINANCIAL REPORTING
IMPLICATIONS OF COVID -19
(An Article by KPMG International)
The article by KPMG, international gives us an understanding on how the financial reporting of business for
31March 2020 will be impacted because of Covid-19, global pandemic. From the article we are going to
compare businesses based on asset light and asset heavy model.

1. Going Concern: Currently, the future of most businesses is uncertain especially those businesses who have
to pay off their large amounts of debt in the next 12months. Asset light companies are in a better place
compared to Asset heavy because, unlike Asset heavy businesses they do not finance their assets through debt
or even if they do it is comparatively way less. Therefore, asset heavy businesses need to be careful while
addressing going concern concept because of the risk of large debt they carry. If the business decides to
dissolve and stop its activities like many manufacturers, it must be clearly stated that is no longer a going
concern and the statements are prepared based on liquidation.

2.Impairment of certain assets: The affects of the pandemic must be taken into consideration for the
impairment of assets. Forecasting, projections and valuation of assets must be done vigilantly taking the
pandemic into account. Asset heavy companies must revaluate their assets, tangible and intangible as
uncertainty prevails, compared to Asset light businesses who do not have plant and machinery etc. The
previous cash flows need to be re-evaluated to record the estimated impairment losses on assets. Future cash
flows or estimated cash flows will be affected by the impairment of these assets. When it comes to intangible
assets like goodwill, etc also need to be re-evaluated and updated accordingly taking the pandemic affects into
account.

3. Revenue Recognition/Accrual Concept: As the conservatism concept goes, any business expecting losses or
has expenses must record it but any profits or revenues can be recorded only when they occur. Similarly like
the revenue recognition concept, businesses need to carefully check on those goods which were dispatched
but did not reach the customer so as to make sure they do not record this as revenue. As losses are concerned,
financial institutions or companies given loan to asset heavy businesses must record their debts as Estimated
credit loss since there is uncertainty in the life of business. Both asset heavy and asset light businesses must
revalue their inventory taking into account the pandemic and record it in the books.

4.Auditied Financial Statements: The current situation has put auditors under extra pressure to analyse and
prepare the correct statements taking into account the effects of the pandemic. The current work from home
environment brings down the businesses ability to prepare the financial statements with the same timelines as
last year. The internal controls cannot be tested by the auditors and thereby chances of fraudulent activities are
high. The lag is causing a delay in auditing the numbers and providing a “true and fair judgement” of the
financial statements. The delay is on both business models and the impact of it is to remain the same for both.
Irrespective of the delay, the financial statements must be audited without compromising on the audit
standards.

5. Communication to stakeholders: The uncertainty of the pandemic and its impact on the business must be
communicated to the stakeholders clearly since they are the prime investors or who hold stake in the business
and also, members of the audit committee and auditors. The businesses revenue, revaluation of assets and
other factors have a major influence on the financial statements and this must be communicated to the
stakeholders by the Chief executives. This is important mainly for asset heavy business’ where a large
uncertainty lies in its existence in the near future. The Chief executives should also be able to provide the
stakeholders to hypothetical solution even if its attainment is close to impossible. The financial statements
must clearly imply the significant changes in the business giving an idea of how far the it can crawl with the
pandemic.