COVID-19 Challenges on

Financial Reporting and Auditing

Sabbir Ahmed, FCA

Vice President, ICAB
Partner, Hoda Vasi Chowdhury & Co
Areas requiring critical estimates and judgments

• Going Concern
• Events after the reporting date
• Impairment of non-current assets (i.e. PP&E, Goodwill, Other Intangibles)
• Significant Increase in Credit Risk (SICR) and Expected Credit Losses (ECLs)
• Fair value measurement
• Classification of financial assets
• Revenue recognition (early settlement discount, rebate, return, refunds)
Areas requiring critical estimates and judgments (cont.)

• Lease modification under IFRS 16 and changes in related assumptions

• Valuation of inventories
• Employee benefits
• Provisions for Onerous contracts
• Deferred tax assets (carry forward tax losses)
• Recognition of Government Grant (i.e. reimbursement of Interest Waiver)
• Insurance claims/recoveries
Going Concern
Potential impacts of COVID 19 shall be considered to assess if an entity is a going concern.

An entity is no longer a going concern if management either intends to liquidate the entity or to cease
trading, or has no realistic alternative but to do so. In assessing whether the going concern assumption is
appropriate, management takes into account all available information about the future, which is at least, but
is not limited to, twelve months from the date when the financial statements are authorised for issue.

Material uncertainties that might cast significant doubt upon an entity’s ability to continue as a going concern
should be disclosed in accordance with IAS 1. The assessment will be specific to the entity's circumstance and
also to consider external supports expected by the entity (i.e. declaration of salary support for export
industry, deferral of loan repayment, additional borrowing at lower interest rate etc.).

If the entity is a going concern, the financial statements should be prepared on a going concern basis. If not,
they should be prepared on a basis other than going concern (i.e. liquidation basis, IFRS 5).
Going concern considerations
• Whether an entity has access to sufficient liquidity and can remain solvent through the period disruption and beyond.
Previously prepared budgets and forecasts may require significant revision by management before use in audit.

• There is often a lag between a general announcement of government stimulus packages and when the actual support is
forthcoming. Entities need to make judgments as to when the ultimate benefit will be provided and whether they
would be benefitted. Auditors to consider the extent to which entity is relying on such support and whether it is
sufficient to cover any short-term liquidity issues, as well as compliance with conditions attached to any support.
• There may be consequences for the availability of financing and/or government financial assistance if a reference by
the auditor to going concern uncertainty in the auditor report results in a breach of banking covenants.

• It may be difficult to obtain a meaningful baseline economic forecast to develop estimated future cash flow scenarios,
including further plausible downside economic scenarios specific to the entity. A focus may be needed on any
assumptions used and how any sensitivity analysis has been performed.

• There is likely to be insufficient reliable data on the potential length of time of closures (or whether there will be future
closures), and the duration of the economic downturn affecting the business
• Whether experiences gained by the entity from past consumer behavior and business practices still apply after the
crisis, or does this require a reassessment and recalibration of models used.
Events after the reporting date: Based on Year-end
Although COVID 19 originated during December 2019, but as at 31 December 2019 it was neither widely
known nor its impacts were felt outside China. COVID 19 started to get global attention only towards end of
January when WHO declared this as health emergency on 30 January 2020.

Finally, on 11 March 2020 WHO declared it a Global Pandemic and countries including Bangladesh, started to
take various measures post WHO declaration during March 2020.

• For the year/period ended on 31 December 2019

 COVID 19 would be mostly non-adjusting event requiring disclosure as subsequent event,
 However, if Going Concern issue, it will be adjusting event and impact should be taken.

• For the year/period ended on 31 March 2020 and 30 June 2020

 It will be adjusting event and all related impacts of COVID 19 shall be considered.
Impairment of non-current assets
(i.e. PP&E, Goodwill, Other Intangibles)
Due to the lower demand of products many entity would reduce its operation and/or close the operation
altogether, resulting lesser utilization of capacity and hence potential impairment of PP&E. Similarly,
depreciation charges based on utilization may need to be revisited as per revised forecast.

Also due to adverse impact on future cash flows resulting from lower sale/demand of products or services,
any goodwill and other intangibles recognized during business combination may be impaired. (IAS 36)

Inventories
Similarly, as inventories shall be measured at lower of cost and net realizable value, subsequent reduction in
selling price of goods or cancellation of customer orders may indicate lower net realizable value of related
inventories and hence write down may require (IAS 2).
Significant Increase in Credit Risk (SICR) & Expected Credit Losses (ECL)
IFRS 9 sets out a framework for determining the amount of expected credit losses (ECL) that should be
recognised. It requires that lifetime ECLs be recognised when there is a significant increase in credit risk (SICR)
on a financial instrument.

A number of assumptions and expectations underlying the way ECLs have been implemented previously may
no longer remain valid in the current situation resulted from COVID 19. Therefore, each entity need to re-
assess their credit risk, timing and uncertainty of future cash flows, moratorium in repayment declared by
Government, potential insolvency of customer and other related factors to calculate provision for
impairment.

There are some guidance from IFRS Foundation on how consider government or bank declared moratorium
on loan repayment (payment holiday) and whether those would result in SICR.

Although in Bangladesh, Banks and NBFI follow Bangladesh Bank Circulars to calculate required loan loss
provision which are based on actual duration of overdue/arrear (i.e. incurred loss model under earlier IAS 39)
and hence IFRS 9 ECL model is not applicable for those entities. Nevertheless, other entities having trade and
other receivables need to consider COVID 19 impact to assess ECL of those balances.
Fair value measurement and classification of financial asset
Fair value measurement (IFRS 13)
Due to significant changes in macro-economic assumptions as well as entity specific conditions from COVID
19, key estimates and variable previously used for fair value measurement of assets and liabilities (i.e. Level 2
and Level 3 inputs) may be no longer valid and hence require re-assessment and supported by the latest
input (IFRS 13).
It is expected that many previously used Level 2 and even Level 1 inputs will move to Level 3 now (i.e. DSE
floor price for listed shares).

Classification of financial assets (IFRS 9)

IFRS 9 requires an entity to classify certain types of financial assets on the basis of ‘business model’ the entity
has adopted to manage those types of assets and expected cash flow pattern from those financial assets (i.e.
held to collect). Due to COVID 19 impact, the business model adopted earlier may not remain valid and hence
need to be reclassified.
Other areas of financial reporting
• Revenue recognition (early settlement discount, rebate, return/refunds, fees)
Due to cancellation of orders and modification of contractual arrangement with customers, many factors such
as probability of return, further discount, timing of transferring risk and reward due to supply chain
disruption etc. need to be assessed before recognizing revenue (IFRS 15).

• Employee benefits
Due to COVID 19 there may be changes to remuneration policies. Especially for defined benefit plan, changes
in key actuarial assumptions like higher expected staff turnover, lower discount rate and return from
investment due to reduced interest rate etc. shall be considered (IAS 19).

• Provisions for Onerous contracts

Delay in fulfilment of contractual obligations may result in penalties or compensation claims unless otherwise
protected and need to be provided for (IAS 37).
Other areas of financial reporting
• Deferred tax (IAS 12)
If any deferred tax asset is recognized on carry forward tax losses the related assumption need to be
revisited especially whether the entity can still make adequate taxable profit. Similarly deferred tax on other
types of temporary/timing differences may need to be reassessed to reflect changed circumstances.

• Leases (IFRS 16)

With adverse impact in business many leases which were earlier expected to be renewed and used in
calculation of lease assets/liabilities may not be renewed now and hence need to be revisited along with
new calculation of lessee’s incremental borrowing rate.

• Insurance companies
COVID 19 would impact insurer from lower policy renewal, refund of premium for business cancellation,
higher claims, and lower returns from investment. On the other hand an entity taking insurance policy may
need to assess whether they are entitled to any claims/ compensation from loss of profits and business
disruption including its recognition.
Other areas of financial reporting
• Government stimulus package
Like many other countries of the world, the Government of Bangladesh has announced a number of
economic stimulus packages for affected businesses.

Although most of these packages are effectively loan arrangement with easier repayment option and at
reduced borrowing rate to be disbursed by Banks and NBFIs, but because of Government subsidizing interest
payment some element Government Grant as prescribed in ‘IAS 20: Accounting for Government Grants and
Disclosure of Government Assistance’ can be attracted especially for Banks and NBFIs disbursing loans under
those packages. The Government has announced to cover a portion of interest for the months of April and
May 2020, which shall be evaluated in particular.
Expected changes in financial reporting

Forward
Looking

Historical
Audit Areas require special attention

• Reliable data and information to validate critical estimates and judgments

• Travel and movement restrictions
• Alternate method of evidence gathering and documentation
• Reporting consideration
• Revision in risk assessment and planned audit procedures
• Increased communication with Management and TCWG
• Higher risk of fraud and application of professional scepticism
• Quality control in audit
Availability of reliable data and information
• Due to rapidly changing environment, in many cases information and data used by management could be
very difficult to validate and assess for reasonableness (i.e. business plan and forecast to support going
concern & impairment, expected credit losses, fair value without active market, etc.)

• Nevertheless, ISA 540 require an auditor to evaluate, based on the audit evidence, whether the accounting
estimates including fair values in the financial statements are either reasonable, or are misstated. In
addition, auditor shall evaluate the adequacy of the disclosure of estimation uncertainty in the financial
statements and review indication of possible management bias.

• Accordingly, auditor shall observe all related steps outlined in ISA 540 and in other auditing standards to
conclude that all critical management estimates and judgments are reasonable and should also obtain
management representation as per ISA 580.

• However, if an auditor is unable to conclude on reasonableness of critical estimates and judgment applied by
management they should discuss the matter with TCWG and try to resolve differences through developing a
‘Point Estimate or Range’ as prescribed in ISA 540. But despite all these efforts if the disagreement persist
and there are no alternative, the auditor may consider modification of the audit report as per ISA 705.
Challenges in auditing estimates
• Due to unique circumstances for accounting estimates prior periods focus may not have much significant
(e.g., despite stable history of collecting debts how to estimate that current debts will be recoverable).
• Inputs and assumptions may not be appropriate in current context and circumstances (e.g., cash flow
forecasts, discount rates, etc.). Historic experience is not likely to be representative of the current and
future environment. Assumptions on the duration of lockdown measures represent critical and uncertain
inputs when developing estimates (e.g. impairment testing).
• Regulatory factors may affect accounting estimates (Government instruction to freeze/waive interest).
• Whether data being used by the entity is relevant and reliable. Management may assert that the
uncertainty is so great that it is not possible to determine a reliable fair value or value in use.
• How the specific entity in a particular jurisdiction is being affected as impacts are not uniform on all.
• Whether valuation specialists used are including caveats in their reports in light of uncertainty in the
current environment and the impact of these caveats on sufficiency of audit evidence.
Travel and movement restriction
• Due to restrictions on travel, meetings and access to client locations, auditors are facing practical difficulties
in carrying out audits. Clients have adopted ‘working from home’ policy, thereby substantially reducing
direct interaction between management and auditor.

• Despite these logistical challenges and underlying conditions the delivery of high quality audit cannot be
compromised. Instead public expectation of high quality has increased.

• Therefore, audits should continue to be planned and performed in compliance with the International
Standards on Auditing (ISA). To enable the auditors to perform audits additional time may be required and
alternative audit procedures may need to be performed in order to obtain sufficient appropriate audit
evidence.

• The auditor should immediately communicate any logistical challenges to conduct audit with both
management and ‘Those Charged With Governance (TCWG)’ including any additional support they require
from the client. The auditor should consider alternate audit procedures to obtain sufficient and appropriate
audit evidence. If needed, TCWG should be made aware of possible modification.
Travel and movement restriction (cont.)
• For example, if a client’s year-end is 31 March / 30 June 2020 and due to country-wide lockdown or
declaration of Red Zone, the Auditor could not able to attend/observe physical stock take of inventories,
another stock take attendance shall be arranged immediately at a subsequent date and physical balance
found during the subsequent date stock take shall be reconciled to the stock report at the year-end (ISA 501
Audit Evidence). In such case the auditor may add an ‘Other matter’ paragraph in audit report as per ‘ISA
706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in Auditor’s Report.’

• Similarly, if an auditor is conducting audit of consolidated financial statements, due to COVID 19 related
matters audit procedures on the component FS including reviewing work component auditor may not be
performed as per ISA 600. Or the auditor may not able to receive direct external confirmations from banks,
debtors, lawyers, suppliers etc. and as per ISA 505 alternate audit procedures may need to be planned.

• If the auditor could not able to conduct any alternate audit procedures due to restrictions from COVID 19
and it was not possible to satisfactorily conclude on the basis of alternate audit procedures the audit report
may need to be modified in accordance with ISA 705.
Unable to attend Inventory/Stock take due to travel restriction
If inventory is material to the financial statements, the auditor is required to obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory by attendance at physical inventory
counting, unless it is impracticable. Considerations related to inventory in the current environment include:

• Whether physical inventory counts can be observed on an alternative date if it cannot be performed at
year end, with audit procedures performed on intervening period.

• Using technology where the client is able to perform a physical inventory count, but auditors are unable
to attend, such as live camera feeds or web or mobile-based video conferencing to observe the inventory
count.

• Performing alternative audit procedures where attendance is impracticable, for example inspection of
documentation of the subsequent sale of specific inventory items acquired or purchased prior to the
physical inventory counting, reviewing and testing inventory roll forwards, obtaining assurance that the
inventory location was not accessible for a period of time, e.g., from security camera footage.
Alternate methods of evidence gathering and documentation
In accordance with ISA 230, Audit Documentation the auditor is required to prepare documentation that
provides a sufficient and appropriate record of the basis for the auditor’s report and evidence that the audit
was planned and performed in accordance with ISAs, and applicable legal and regulatory requirements. In
the current environment documenting professional judgments and the exercise of professional skepticism,
as well as discussions with management and TCWG related to the impact of Covid-19, is critical.

Some of the ways to obtain audit evidence could be as follows:

• Uploading files by the client with access provided to the audit engagement team
• Video calls and/or screen sharing to review the client’s system or use of remote access
• Detailed memorandum or questionnaire provided to management, corroborated with discussions
• Information from various business units provided directly to the audit team so they can perform their own
procedures on the financial information.
• If sufficient appropriate evidence cannot be obtained to enable the auditor to conclude, the auditor need
to consider the impact on the auditor’s report arising from the limitation of scope.
Reporting consideration
Modifications to the auditor’s opinion may arise as a result of Covid 19 impacts due to:

Material misstatement of the financial statements

i. The proper application of the stated accounting policies. For example, inappropriate recognition and
measurement of assets and liabilities in accordance with the stated accounting policies.
ii. The appropriateness or adequacy of disclosures in the financial statements. For example, when the
financial statements do not include all of the disclosures required to appropriately describe effects of
current circumstances on the entity resulting from the Covid-19 pandemic, including sufficient
description of relevant risks, estimates and judgments applied for that entity.

Inability to obtain sufficient appropriate audit evidence

Circumstances beyond the control of the entity or circumstances relating the nature or timing of the
auditor’s work. For example, access to the entity’s accounting records or the ability to obtain audit
evidence may be restricted due to government imposed lockdowns and travel bans during the Covid-19
pandemic (e.g., access to information or people, information which may relate to the entity or its
components, including associates and joint ventures etc.)
Reporting consideration on going concern issue
Based on the situation of the entity and status of the going concern assessment, the following steps can be taken:
• If going concern basis is appropriate but a material uncertainty has been identified and proper disclosures have been
made, an unmodified opinion can be expressed. A separate section may be included under the heading ‘Material
Uncertainty Related to Going Concern’, which also draws attention to relevant disclosures within the financial
statements.
• If the going concern basis is appropriate but a material uncertainty has been identified, and proper disclosures have
not been made, normally a modified (qualified) opinion to be expressed. The ‘Basis for Qualified Opinion’ section of
the report shall state that a material uncertainty exists that may cause a significant doubt on the entity’s ability to
continue as a going concern and that the matter is not appropriately disclosed in the entity’s financial statements.

• If the financial statements have been prepared on a going concern basis, but the use of the going concern basis of
accounting is inappropriate a modified (adverse) opinion to be expressed.

• If the entity is not a going concern and the financial statements have been appropriately prepared on a basis other
than going concern and the alternative basis of accounting is appropriate in the circumstances, an unmodified opinion
to be expressed if there is adequate disclosure about the basis of accounting on which the financial statements are
prepared. An emphasis of matter paragraph may be considered drawing attention to alternative basis of accounting.
Other impacts on audit
Potential COVID 19 impacts on audit with reference to the related auditing standards:

• Identifying new risks from COVID 19 related impact and re-assessments of the initial Risk of Material Misstatements
(RMM) and Materiality in line with ‘ISA 315(Revised) Identifying and Assessing the Risks of Material Misstatement
Through Understanding the Entity and its Environment’ and ‘ISA 320 Materiality in Planning and Performing an Audit’.

• Risk of material misstatements in financial statements due to fraud including fraud risk factors identified previously
may require re-assessment due to pervasive changes in economic environment from COVID 19 related impact and
hence the auditor should consider this matter in audit in in accordance with ‘ISA 240 The Auditor's Responsibilities
Relating to Fraud in An Audit of Financial Statements’.

• Obtain specific representations from management especially on any estimates and judgments applied related to
COVID 19 related impact in line with ‘ISA 580 Written Representations’.

• Due to COVID 19 related impact if any changes is required in Key Audit Matters (KAM) previously communicated to
TCWG updated KAM should be discussed with Management and TCWG in accordance with ‘ISA 701 Communicating
Key Audit Matters in the Independent Auditor's Report’.
Constant communication with management and TCWG
Auditor need to maintain continuous communication with management and TCWG and constantly made them aware
of any audit related issues, be it restrictions of movement or difficulties in obtaining audit evidence. Some of the
matters need to be communicated with the TCWG, in particular with audit committee are as follows:

• Significant changes in planned scope and timing of audit, modifications to audit plan and key audit matters (KAM);
• Major difficulties/restrictions encountered during the audit in areas such as absence from physical attendance during
stock take, unavailability of management for corroborative inquiry, lack of response in external confirmations etc.
resulting lack of sufficient appropriate audit evidence and/or completing alternate audit procedures;
• Critical matters that were discussed or subject to correspondence with management, including disagreements on key
estimates and judgments taken by management on COVID 19 related impact;
• Expected modifications to the auditor’s report;
• Expected delay in finalization of audit due to changes circumstances and lack of clarity to validate reasonableness of
management assumptions on key COVID 19 related matters.

Due to these changes if scope of audit and resource requirement significantly increased please do not hesitate to discuss
with management and TCWG for cost overrun.
 Thank you for your kind presence.

Wishing you all a safe stay during this difficult time.