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Impact of Covid-19 on Financial Reporting

Impact of Covid-19 on Financial Reporting

The start of the first quarter was hit by the Pandemic due to Covid-19, also known as Coronavirus. The expected growth and returns of every company have fallen drastically. Due to this government has restricted economic activity in the world. The effect was so impactful that it disrupted the day to day activities, where the government went into complete lockdown. This was due to the global outbreak of the pandemic. This brought out certain financial issues. In this article, we are explaining the Impact of Covid-19 on Financial Reporting.

The issues can be taken down in a few questions:

a. What were the pandemic efforts on financial results/ financial reporting and how they have to be disclosed?
b. What measures have been taken for the associated business risk and how they are communicated to the shareholders?

These are some of the questions which have arisen in the wave of Pandemic?

The answer to this question would be different for every industry. The worst-hit were the hospitality, retail and transport sector.

Common Challenges by the industries and response to be made immediately by the industries:

  1. Cash Management and Forecasting cash Inflows

To determine the implications of cash flows and liquidity to maintain a healthy balance sheet.

  1. Scenario planning and analysis

To maintain business continuity, “No regrets” activities to be implemented now.

  1. Capital raising and funding
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What is funding and how it is available.

  1. Financial Reporting and Regulation

Implication of the financial reporting Services and the right skills and technical capabilities with the existing team enables management to make a critical business decision.

Responses by the management for Financial reporting as follows

Management can consider the following response to the various business issues:

Responses in financial reporting given by the management
  1. Do the Impairment reviews of the financial and non-financial assets.
  2. Do the valuation of assets and Inventory obsolescence.
  3. Do debt restructuring by following lower interest rates, moratorium, and renegotiation of repayment terms could trigger debt modifications, or extinguish accounting.
  4. Do covenant reporting and advice on the potential covenant breach or default.
  5. Stock compensation and incentive plans to be introduced, which incorporates modification due to the changes in the earnings or performance targets.
  6. There should be recoverability of differed tax assets based on the projections of future profitability.
  7. Reporting the impact of Covid-19 on the financial results and disclosures.
  8. Assessment of any relief from the government as a grant.
  9. Disclosures regarding the risk and uncertainties.

This is the list of critical financial reporting areas where the entities need to take steps when determining the impact on business and on their financial position and disclosure of the financial statements[1] to be made by the company due to Covid 19:

  1. Going Concern Assumption

It is the company law principle that a company has a perpetual succession.

The financial principles are very clear about the aspect that an entity is forever. The company has perpetual succession, or it is never-ending.

From this point of view, it is to be considered that, the impact of Covid-19 should be assessed on the balance sheet and to be checked whether going concern assumption is appropriate to them or not.

  1. Tangible and Intangible assets
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The assets are classified into two categories as tangible and intangible assets. The tangible assets include property, machinery or equipments, whereas intangible assets include-trademarks, patents, copyright etc.

It has to be evaluated that there could be an impact of some legal factors which has to be checked on their values. This means while assessing or computing the importance of these assets, it needs to be prevented from the legal side- such as there could be a decrease in import or exports for the company in the current quarter or coming quarters, and restriction of contracts with alien enemies/ countries-those contracts shall be prohibited.

Covid-19 will reduce future productivity and increases the breach of stipulated conditions in the contracts with the parties.

As the financial reporting over the assets like depreciation which still needs to be charged through the assets were underutilized due to unforeseeable circumstances.

  1. Employee/ Labour Law Amendments

Various entities had to lay off their employees or the workforce. The pressure entity to pay the termination benefits, to the terminated employees.

The management will have to take the expense of the benefits given or to see when to calculate them as a liability or expense in the balance sheet, in their financial reporting.

Looking at the current scenario of Pandemic, there were changes made in the current labour law-like- shift in the working hours and what pattern work to be followed.
The entity needs to calculate the defined benefits obligations- such as- appropriate interest rate, future salary increase, or employee turnover.

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In the financial reporting, the company shall give the estimates over the defined benefit obligations and the assumptions. Also, about the sudden fall of the market and the sudden decline of the corporate bonds rates that were due to the Covid-19. The company has to clear whether Coviid-19 has impacted their assumptions in its financial reporting and estimates needs to be changed or not.

  1. Tax Implications

The impact of reduced flow of goods and services and its effect on the transfer pricing agreements.

In financial reporting, it has to be shown the impact of differed tax benefits.

  1. Lease Agreements/ Rent Agreements

There would be renting or leasing agreements clauses and its clause of repayment due to the impact of Covid-19. In the financial reporting, some revised terms for payments and concessions shall be recorded while accounting for them in the balance sheets and reports.

The new lease agreements have to be recorded, shown as the effect of Covid-19.


It can be concluded that industries and business houses have been impacted by the Covid-19. The critical financial reporting areas that entities need to check while determining the impact on their business, and on the results, is the financial position and disclosure of their financial statements. The article has touched a few areas where the financial reporting needs to be done.

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