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COVID-19 is a pandemic that has affected the business all around the globe. There is a halt in the economy and most of the businesses are shut down (Bartik et al, 2020). Also, the demand has reduced and the supply chain has been disrupted for the products. These effects have brought certain changes in reporting patterns of the companies. This report aims at studying the impacts of COVID-19 on the reporting patterns concerning IFRS/IAS/AASP standards. The report discusses the 8 considerations that will have an impact concerning coronavirus and then 5 will be discussed in brief while the 2 effects on accounting standards will be explained in detail.
Accounting for leases under IAS 17 will be impacted by a coronavirus.
Accounting for impairment of indefinite-lived assets according to IAS 36 will be impacted.
Accounting for Employee benefit as per IAS 19 will have an impact.
Accounting for share base payment under IFRS 2 will have an impact.
Accounting for intangible assets AASB 3 will be affected.
Accounting for assets that are Property, plant, and equipment under IAS 16 will be affected.
IFRS 9 for the financial instrument that shows the effect on expected credit losses will be affected.
IAS 20 Accounting for Government grants and disclosures of government assistance will be impacted by the coronavirus.
Impact on Accounting for leases under IAS 17: The terms of leasing arrangements can be might be renegotiated because of coronavirus between the lessor and lessee. There are chances that a lessee might grant some concession concerning the lease payments. Also, in certain cases government is providing compensation and in that scenario there are chances that a lessor might get and incentive of concession (KPMG, 2020). This will impact the leasing arrangements under IFRS 16 as the concession that will be provided has to be accounted and it has to be decided whether that concession will be spread over the remaining part of the lease or they should be considered as government grants. In case the payments are waived off for a month or two then how will that loss will be reported. With that, if any new leases are being formed than they will be having a consideration with regards to COVID-19. Revenues on the leases will be impacted especially from where the assets are linked with revenues due to an activity of a business that is in the contract.
Impact on impairment of indefinite-lived assets according to IAS 36/ AASB3: Businesses have to consider the impact on impairment of assets. According to accounting standard, IAS 36 assets go through the test of impairment once in every year. The ceasing of operations temporarily has led to a decline in the prices, demand, and profitability that indicates impairment. There should be a consideration in the management as there are chances that the cash flows in the future will be impacted by COVID-19 and operating costs will rise. Due to the uncertainty of the event future cash flows for the company will be impacted that in turn will lead to a fall in the prices of entity share and will require impairment of goodwill and assets. These assets should be tested outside the cycle that is done annually (Pwc, 2020). Also, the budgets and the forecasts that have been prepared on assumptions concerning the date of earlier impairment need to be revised for reflecting the conditions prevailing in the economy and address the risks and uncertainty.
Accounting for Liabilities under IFRS 9: Under IFRS 9, liabilities or debt instruments are classified. The model of ECL that is expected credit losses will be affected the most. The losses for the credit are measured on a probability-weighted amount as per the information that is available for future events on the reporting date. The reports prepared were based on the information that was available up to December 2019. Now, the outbreak of pandemic has changed all the situation and it is practically impossible to find the probability-weighted measurements of the pandemic as data for the virus and its impact is not available yet. So, for the purpose, ECL is required to be calculated again (KPMg, 2020). With that the cost of liabilities will increase. The supply of goods will be delayed and the cost of material and labor will be increased. This will in turn increase the liabilities for the companies and hence should be reported accordingly. Certain contracts for the company will become onerous as there will be unavoidable costs and the company has to meet the obligations even when the revenue has not been generated from that obligation. These are certain impacts that will be faced by the company under accounting for liabilities under IFRS 9.
Impact on Accounting for Employee benefit and share payments as per IAS 19 and IFRS 2: Due to recent effects, the yield on high-quality bonds or the interest rate that was prevailing and the valuations of currency has changed. For this reason management has to consider the payments for the shares and obligations with respect to legal or constructive obligations regarding employees. There are chances that the workforce will be reduced by the organization and IAS 19 requires that liabilities with respect to employees who are being terminated should be recognized (PWC, 2020). The company then has to make extensive disclosures with regard to the liabilities of the employees and also the changes that have been made about the assumptions for that. The extensive disclosures are required by the accounting standard IAS 19. The management also requires deciding whether it is obligated to pay the employees concerning the virus-like sick pay etc. Also, concerning share payments, the changes and the modifications are to be accounted and the additional expenses should be recognized. Even if the share payments are canceled then also the recognition of remaining expenses is to be made immediately. Thus, the accounting for IFRS 2 will be impacted.
Impact on assets i.e. Accounting for assets that are Property, plant, and equipment under IAS 16 and Cash as per accounting standard IAS 7: IAS 7 defines the highly liquid investments as cash equivalents and whose value does not change. The impact of COVID-19 has declined the value of these funds significantly. Some money market funds allow the restriction of redemptions in cases of unlikely events and one can be COVID-19. As per this management would like to consider the investments considered under cash equivalents be treated as restriction or redemptions.
For property plant and equipment under IAS 26 depreciation is to be charged on asset even when it lies idle. This will impact the fair value of assets. Fair value estimations include the market multiple approach as per the discounted cash flow approach. For calculating the discounted cash flow various market inputs are considered that include risk-free rates and due to COVID 19 they have reduced significantly and also the cost of debt has declined. This in turn will affect the discounted cash flow model and overall effect the value that will be impacted as inflows of cash have been restricted in the situation.
BHP Billiton is an Australian mining, metals, and Petroleum Company. COVID 19 has impacted the mining industry hard as due to lockdown the company is not functioning and mining activities or the projects has come to halt. This will create an impact on the accounting of the company.
The first measure of accounting that will be affected is the impact on the impairment of indefinite-lived assets. The company measures the goodwill at fair value. The amounts paid for the intangible assets are capitalized by the group and it is considered that the intangible assets will contribute to future revenues for the company by the generation of revenue or reduction in the cost. The value that is mentioned in the balance sheet for these assets is fair value less the impairment charges and amortization expenses. But in the recent times, there are no revenues that are being generated by the company through these intangible assets. The future cash flows will be affected, which, in turn, will impact the value of these assets.
Due to a halt in activity the company is not generating any profits ( BHP Annual report, 2019). This is affecting the market value and demand for the product of the organization. So, management will have to re-evaluate the values with regards to its impairment cost of goodwill and intangibles. This will increase the expense of the company. But, the company has to depict the reduced value because of COVID-19 impact. The losses will be shown by the reduction in the value of the company. No revenue is being generated by the company at this point. There are no cash flows and no assets are bringing any amount in the company. It will create an impact on the accounting procedure for the calculation of intangibles. The value of goodwill will be reconsidered and impaired cost will rise for the company.
Another impact that will be created on the company will be on the Employee benefit accounting. The company provides incentives to the employees in the form of shares. These incentives are also provided for the short term. In present times of COVID 19 it is on the discretion of management whether they will be providing the short term incentive to the employees. During this time, the economy is at a halt, and mining projects has also been stopped. This has reduced the income of the company. Most of the companies are firing the staff. The short term incentive plan of the company for its employees can also get demolished to save some cost for the company. Also, the company provides annual leave, and if they are not utilized than they are paid off at the date of reporting. These are paid within the employee benefit scheme for future payments. But due to the pandemic employees are at home and not working. There are chances that the company might cancel the leave entitlements of the employees.
If the company remove short term incentives of shares for the employees, it will create a negative image for the company. Also, if payments are not made to them then employees will be unsatisfied as the company will not be supporting them in hard times. So, the management can reduce the cost by paying less and these payments are to be recorded as expenses. No benefit will be derived from these. This will affect the accounting for the benefit of employees as expenses will be increased due to lockdown and fewer payments will be received on leave entitlements or there are chances that they might get waived off.
In this manner recent pandemic will create an impact on the accounting methods for the company. Some losses are being faced and in the times to come the company will have to manage these losses. The one way is to differ some of them and some might be waived off. These decisions of the management will affect the accounting of the organization.
COVID 19 will impact various accounting standards. The economy has slowed down and various business has stopped. This will create an impact on the formation of financial reports and their calculation. The accounting standards that will be affected involve accounting for leases, impairment, employee benefits, liabilities, etc. BHP Billiton a mining company will also have impacts as the company's cash flow and revenue have declined that will affect the intangibles of the company. Accordingly there will be changes in the accounting pattern of the company.
Annual report. (2019). BHP. Retrieved from: https://www.bhp.com/-/media/documents/investors/annual-reports/2019/bhpannualreport2019.pdf
Bartik, A. W., Bertrand, M., Cullen, Z. B., Glaeser, E. L., Luca, M., & Stanton, C. T. (2020). How are small businesses adjusting to COVID-19? Early evidence from a survey (No. w26989). National Bureau of Economic Research. Retrieved from: https://www.nber.org/papers/w26989
KPMG. (2020). COVID-19. Financial Reporting. Retrieved from: https://home.kpmg/xx/en/home/insights/2020/03/covid-19-financial-reporting-resource-centre.html
Pwc. (2020). Accounting implications of the effects of coronavirus. Retrieved from: https://inform.pwc.com/inform2/show?action=informContent&id=2056233603128861
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