Several epidemics came in the past, infected countless people, extant for a few months and then gradually faded. The outbreak of Coronavirus is massive all over the world with a high level of uncertainty, beyond the knowledge of many big businesses. The impact of COVID-19 has created an economic shock across the globe additionally many organizations are facing quite a few significant challenges to which they are not prepared.
Taking into account the extent of rapid spread of the virus with a steep upsurge in the number of cases and sudden rise in the death toll the economic activity tumbled down. The change in circumstances might trigger unexpected disruptions in business operations and a need to think through some of the Accounting Considerations as continued from my previous blog.
- Asset Impairment: The prolonged outbreak of COVID-19 is likely to cause asset impairments. Most of the companies get tested for their impairments on intangibles, goodwill and group of long-lived assets like property, plant and equipment. Companies are mostly concerned about 3 main aspects: o Unplanned production bottlenecks and stoppages in work due to material or labor shortage could cause a sudden drop in the production. At this point the companies consider the effects on its inventory costing.
- o Businesses whose supply chains have been interrupted or whose sales have been crashed due to the outbreak should evaluate carrying value of their inventory especially – perishable products, seasonal inventories and products with shorter shelf-lives would be at a highest risk of loss.
Supply Chain Disruption:
- o Several companies are reliant on their workforce the outbreak triggered the closure of all the commercial centers leading to paid holidays for the workforce. It appears that, huge delays are expected in sourcing and stoppage in the production of the goods.
- o In the services sector where business happens only if there is physical presence of the employees, firms should start thinking if it is viable to continue the business further or not. o The decline in customer demand in travel, luxury and retail sectors will significantly impact the short term and long term cash flow projections.
- o Unpredictability of the scenario is affecting the large scale events / sports events leading to cancellation as well as reduction in the cash inflow.
Cash Flow Projections:
- Risk Assessment: Enterprises regularly address the most common risks attributing to their organizational objectives. Evaluating the organizations volatile risk appetite for the period of extreme crisis could completely go wrong. Historical models used for risk assessment may not be applicable at this time of economic crisis. The risk management
- amendments in this event of uncertainty cannot be made for a variable consideration. Businesses should update their accounting models, revise their estimates and note down the key assumptions about the rebates and returns.
- Hedging & Debt modifications: o A large number of business transactions could be put off or on hold or might take place in low volumes than initial projection. Companies should assess whether the transaction has still “Probability of occurring or not” in these circumstances.
- o The firms are already traumatized by their cash flow challenges due to obstructions in their operations, lost revenues leading to higher operating costs. These businesses might need to modify their terms of existing debt agreements or get waivers if they do not satisfy the debt promises.
Considering the unknown variables surrounding the pandemic, anticipating the virus’s effect on the global economy is unpredictable. In addition, it is essential to review economic crisis and put different uncertain scenarios to test to develop business survival strategies.