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Accounting and Financial Reporting Contemplations in COVID 19 scenario

Date: 06 May 2020

Major economic and financial markets, and virtually all the industries and governments are affected by the COVID-19 pandemic. Most of the industries are facing challenges allied with the fiscal conditions ensuing from efforts to address it. Many entities in the travel, hospitality, leisure, and retail industries have experienced sharp declines in revenues due to regulatory and organizational mandates and voluntary changes like social distancing in consumer behavior. For addressing these economic challenges, government authorities are pursuing laws and other related initiatives. In March 2020, the United States administration enacted several new laws, most conspicuously the CARES Act, which provides economy-wide financial stimulus of $2.2 trillion.

With spread of the pandemic, entities had experienced conditions often allied with a general economic recession, including, but not limited to, economic market volatility and erosion of market value, liquidity concerns, deteriorating credit, increasing unemployment, further increases in government intervention, increasing inventory levels, broad declines in consumer discretionary spending, layoffs and furloughs, reductions in production because of decreased demand and supply constrictions, and other restructuring activities. These circumstances could result in a prolonged negative impact on an entity’s fiscal conditions.

The use of avant-garde information is invasive in an entity's evaluation of, among other things, the impairment of nonfinancial assets, the steadfastness of deferred tax assets, and the entity's ability to persist as a going concern. Unique complexities allied with preparing forward-looking information as a result of the pandemic and economic downward spiral include the following:
  • There is an enormously wide range of possible outcomes. There is a predominantly high degree of ambiguity about the ultimate trajectory of the pandemic and the time looked-for a return to a "steady state."
  • The associated financial impact of the pandemic is highly reliant on variables that are intricate to predict.
  • Each entity must then interpret the effect of the macro conditions into approximation of its own potential cash flows.

Nevertheless, entities will need to construct good-faith estimates, prepare inclusive documentation supporting the basis for such approximations, and endow with robust disclosure of the key assumptions used along with focusing on the potential sensitivity to their change.

Asset’s recoverability and impairment:

Perhaps the majority of acute instances of the amplified challenge associated with advanced information are the impairment analysis for long-standing assets, elusive, and goodwill. These nonfinancial assets utilize recoverability and impairment models that majorly rely on the expansion of cash flow protrusions that are subject to the momentous uncertainties. However, impairments ascertain a new cost basis for the assets and it does not provide consent for the ensuing reversal of the documented impairment.

Modification of contracts:

Changes in economic scenario caused by the COVID-19 endemic will cause many entities to renegotiate the provisions and terms of their existing agreements and contracts. As a result of the implied changes, entities will need to be ensured that the modifications are made after consideration of appropriate US GAAP guidance.

Consequent events:

It is challenging for most of the entities to separate predictable and unpredictable subsequent events in a global economic scenario that is tremendously volatile and in which major developments occurs on daily bases like the reaction of stock market to new information. With the advancement of global landscape, entities are encouraged to remain vigilant, and to consult with their accounting advisers.

Entities must cautiously consider their distinctive circumstances and risk exposures at the time of analyzing the impact of events that may affect their financial reporting. Explicitly, financial reporting should convey all material current or potential effects of the pandemic.

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