The impact of covid-19 has been universal, hitting countries, enterprises and individuals alike. However, despite these disruptions, all of them have had to find new ways to deal with it and move forward. With no visibility on a permanent solution, companies are dealing with significant uncertainties. Many cities across the world that opened up and had to subsequently impose further lockdowns, shows the degree of uncertainty around timing of recovery.
For corporates, it is important to not just deal with the impact on their business, but also to engage with key stakeholders, including lenders and investors, so as to enable them to make their lending and investment related decisions, including voting on key resolutions. It is therefore the management’s responsibility to make fair disclosures of covid-19 related impacts to these stakeholders, providing timely and high quality information about the impact on operating performance, financial position and prospects of the company.
While fully acknowledging the evolving nature of these unprecedented challenges, it makes it all the more important to focus on providing high quality disclosures. It is in this context that IOSCO (International Organisation of Securities Commissions) encouraged and Sebi (Securities and Exchange Board of India) subsequently mandated companies to make periodic disclosures about the impact of covid-19 on their business and financial statements and how they are dealing with these impacts.
When looking at the corporate results announced by companies (Nifty 50) for the quarter and year ending 31 March 2020 as well as subsequent filings done pursuant to the Sebi circular, it seems to suggest that companies have largely stuck to providing a high level qualitative view on how they are impacted, with only a handful providing a view on the financial impacts.
There are several uncertainties involved and many unknown variables that companies are working with, but at the same time there are still a range of outcomes that the management is working with. It may be worthwhile to consider a level of disclosures, especially focusing on the impact on amounts recognised in the financial statements and considering the heightened uncertainty, there need to be enhanced disclosures on areas involving significant judgements and estimates.
Companies have been impacted in several areas, including recognition of revenues, valuation of inventories, impairment of assets, recoverability of receivables and loans, fair value measurements, accounting for loss making or onerous contracts, restructuring provisions and the like. The assessment of going concern at every interim period has also become an important consideration as companies prepared their financial reports. All of these judgements and estimates would need to be continuously reassessed by companies using all reasonable and supportable information available—historic, current and forward-looking to the extent possible.
Therefore, there is a need for companies to enhance the quality and consistency in their covid-19 disclosures. In determining how companies should be required to assess and report the impacts of covid-19, consideration should be given to the following:
- Ability of the company to reliably quantify the income and expenses that relate to covid-19
- Manner of disclosure of the quantifiable impacts in the construct of the financial statements
- Extent of information that should be included in the notes to the financial statements and outside, to provide sufficient and high-quality disclosure of these impacts on the company’s performance, position and prospects.
In determining the company’s ability to reliably quantify impact, consideration should be given to only those incomes and expenses that are incremental and directly attributable to covid-19. Therefore, items of costs such as rent and utilities, or depreciation on idle facilities due to temporary closure, or payroll for idle employees wouldn’t meet these criteria as these aren’t incremental in nature. Companies could, however, provide additional disclosures in the notes to explain some of these costs, provided it isn’t misleading.
Where the impact can be quantified, it may be disclosed as a separate line item on the face of the financial statements, potentially as an exceptional item. However, if the impact is pervasive and impacting nearly all line items, then it may be more appropriate to disclose these in the notes to accounts. In disclosing these impacts, care should also be taken to ensure that it isn’t highlighting only one side – for instance reporting the costs, without considering the revenues or other benefits, including government assistance, is not appropriate.
Where the impacts are not entirely quantifiable reliably, the company should include sufficient detailed disclosures, with quantification of elements therein, to the extent possible and qualitative elements for the other elements.
Keeping the experience from the reporting done by companies in the last quarter of FY19-20, Sebi should consider some follow-on guidance to address this need for consistency in reporting. We are in this for a reasonably long haul, at least the next few quarters, and the sooner the quality and consistency of reporting can be enhanced, a wide set of stakeholders will stand to benefit.
(A version of this article appeared in Mint, 29 July 2020)