New challenges have emerged in preparing financial statements for business entities in the aftermath of COVID 19.
The auditors, in a report submitted to the Financial Reporting Council (FRC) recently, highlighted the challenges and the possible impacts on financial reporting.
Due to the significant changes in macro-economic assumptions as well as the entity-specific conditions from COVID-19, key estimates and variable previously used for fair value measurement of assets and liabilities may no longer be valid and need re-assessment.
The report said due to the cancellation of orders and modification of contractual arrangement with customers factors such as probability of return, further discount, timing of transferring risk and reward due to supply chain disruption need to be assessed before figuring out revenue.
The report said due to COVID-19, there may be changes in remuneration policies, especially for defined benefit plan changes in key actuarial assumptions should make lower estimate considering the lower income.
It said if any deferred tax asset is recognised on carry forward tax losses, the related assumption needs to be revisited, especially whether the entity can still make adequate taxable profit after COVID-19 impact, which will be available to offset such carry forward tax losses.
COVID-19 would impact insurers 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 it is entitled to any claim/ compensation from loss of profits and business disruption, including timing of recognition of such claim or compensation, the report said.
It said the government announced a number of economic stimulus packages for affected businesses and such incentives would fall under 'IAS 20: Accounting for Government Grants and Disclosure of Government Assistance'.
This is a new area that needs to be adjusted with financial reporting.
Due to lockdown, auditors are facing practical difficulties in carrying out audits.
"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," it said.
It said they assume an entity is a going concern while preparing financial statements, but the pandemic forced many to close their factories.
"Given the unpredictable nature and impact of the COVID-19 outbreak, in some cases it might be appropriate to consider the possibility of delaying the approval of the financial statements and issuance of audit report until more certainty about the impact of such outbreak is known."
It said if the client is not willing to extend the timeline of completing the audit, the auditors need to assess whether they have obtained sufficient and appropriate audit evidence to make an opinion. If the answer is negative, the auditor needs to appropriately modify audit report.
The report said all listed entities in Bangladesh are required to publish annual reports and most likely there would be comments on COVID-19 and its impact on those entities in their annual reports.
"The auditor now has an added responsibility to read and comment on other information published along with the financial statements such as contents in annual report," it added.
