Author – Balasubramanian Vanchinathan
Covid has taken the world by storm for over 2 years. It has struck like a bolt of lightning and devoured not just human lives but dismantled millions of businesses as well. The pandemic has disrupted the world economy since the outbreak of the virus. Businesses in the UAE too have taken a hit all of a sudden. The International Financial Reporting Standards Board (IFRSB) has expressed concerns about Covid-19’s impact on the global businesses.
While we are navigating unprecedented times, things are gradually getting quite better. However, markets are still volatile and unpredictable followed by a series of tumultuous events of Covid-19. Businesses are apprehensive and continue going through turmoil marked by the major upheavals in the financial markets.
Over the last couple of years, organizations have lost their key clients, valuable projects, and much of their market value. All these factors collectively have heavily influenced the business functions and caused irreversible damage to various aspects of it. We must understand the covid-19 impact in our balance sheet accounts during these unfavourable times.
It is pertinent to decide the further roadmap, examine the problematic functional areas, and assess the profit and loss accounts applying IFRS standards. Determining the real impact on your assets along with valuation is a daunting task but companies must carry out impairment assessments for certain types of assets.
Business continuity and going concern issue
The pandemic has been a nightmare for all businesses. If we talk about Hospitality, Tourism, Aviation, Manufacturing and Hotel industries in particular, it has turned out to be catastrophic. All businesses that rely heavily on technology or strong technical infrastructure have somehow managed to navigate. However, businesses with no to little scope of operating remotely have nearly collapsed.
The feasibility of business through trial balance is the need of an hour. It has to reflect on the IFRS financial statements to address the issue. Based on that, we can decide the covid impact on valuation as to when these businesses will achieve the pre-covid level and start functioning as usual.
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Valuation of assets
Covid has imposed great uncertainties lurking over the world. Businesses are in the doldrums and the future seems bleak. Given the present scenario, trial balance assessment is essential. It is decisive to build a further business roadmap for sustainability. Here are some of the most important asset valuations to be done:
Property, plant and equipment
These are long-term assets largely associated with costs. They need a thorough assessment of profit and loss accounts in terms of utilization. Any indication that proves a little to no scope of longevity of these assets is an impairment trigger and needs to be taken into account.
The pandemic has irreversibly affected certain preferences of buyers. If there is an indicator suggesting the permanent fall in demand is a call of action. It is a clear sign of the inventory being obsolete in the future. You have a non-saleable stock piled up in the warehouse that practically has no value. There is no point in spending money preserving it.
Besides, you also need to keep tight check on falling market prices of products. If your inventory cost is higher than the selling price, it is a call of impairment loss recognition considering the difference between the carrying and net realizable value.
Home is a new office since the pandemic has kicked it and likely to be a permanent one for millions around the world. It has consequently led to rapid price falls of commercial and rental properties. Entities must evaluate the cost model figuring out how it is played out in their day-to-day operational costs.
Businesses need to find out whether it is worth paying for office spaces and a corporate set up while employees are working remotely and it is going to stay them for a lot of them forever. It is a major impairment trigger to work upon considering its implications as it does not just include the value of the property but the maintenance cost as well.
If the pandemic has a major impact on the businesses of the investees, impact of the same on the carrying value need to be considered.
Reassessment of rental concession on long term leases
The impact of rental concessions arising out of pandemic situation negotiated with lessor needs to be considered for valuing the leased assets related liabilities. It is worth noting that The International Accounting Standards Board (IASB) has permitted lessees not to modify the lease values for rent concessions for payments due on or before June 2022.
Disclosure requirement in the financial statements
There has to be an absolute transparency in the financial statement to have a clear picture. The impact of pandemic has to be reflected in the numbers to take the next constructive steps of improvement. It is pertinent to conduct a fair assessment for profit and loss accounts rather than just assumptions. It also needs revisions and refinement at regular intervals with respect to the changing pandemic scenarios. We have been living with it for over a year now and it has made ever lasting impact on the asset value as well as the liabilities in balance sheet account since its beginning. Companies assess financial risks every now and then and at this point the biggest financial risks arise from Covid-19.
Implication of financing covenant breach
If you happen to figure out the covenant breach, the entity is first supposed to identify the cause whether it is due to the pandemic or not. It needs to be lucidly stated in the balance sheet and financial reports along with its potential impacts even if the reported numbers don’t reflect it.
Implication contract breaches
The pandemic has ruined the planning, washed away profits and altered the business forecast. Some projects have gone on a toss forever, some with great uncertainty about their future and some of them have closed forever.
In such unprecedented times, business find hard to survive and are not able to keep up with their contractual agreements. It has serious implications on assets value. You should seriously take it into account for financial security.
The Covid-19 has ubiquitous consequences at both micro and macro levels of your businesses. The intensity can vary depending upon several factors. The underlying point is that the prevailing market situations will lead towards accounting implications and impose a significant challenge to the recoverability of various assets.
N.R. Doshi & Partners has been successfully assisting businesses to swiftly navigate the challenging covid times. Our experienced VAT consultants in the UAE are adept at applying various models and aware of triggering events for impairment assessments.
We mitigate the risk with the overall assessment of tangible, intangible, and other financial assets that have a significant impact on your balance sheet accounts. In the process, we also help you determine the recoverable assets by closely examining the projected cash flow.
If your business is in a fix and you’re looking for somebody to bring it back on track, we know the appropriate models and assumptions to apply with fair value measurements. You can get in touch with us on email@example.com or +971 50 6591233