WHEN the media started reporting on Covid-19 in early 2020, no one could imagine the magnitude of its impact on personal and professional lives. Six months on, we are facing mass layoffs, salary deductions and bankruptcies.
One major challenge that corporations will face now is reporting financial results for the period during which their operations were wholly or partially affected by the pandemic-induced lockdowns. Traditional accounting measures require companies to show the financial impact of the pandemic in their books. If they do it honestly, their books will look like no less than a complete nightmare.
Take the example of International Accounting Standard (IAS) 36, which requires companies to test all their non-current assets for impairment if there are indicators of impairment. In simple terms, the term “indicator” refers to an internal or external incident, which may suggest that assets will not be generating the same economic benefits as before. It’s obvious that buildings will not be generating the same rent, planes will not be transporting the same number of passengers and machines will not be producing the same quantity of output after Covid-19.
This reduction in economic benefits from assets should be reported as losses or, to be more specific, impairment losses.
Income statements should be redesigned to incorporate the figure of PBITC or profit before interest, tax and coronavirus
Similarly, IAS 2 requires the value of stock to be written down to its realisable value if it is lower than the original cost of the stock. IAS 37 requires creating massive provisions. All assets measured at fair value may lead to the recognition of losses if their market value has gone down. The revised revenue standard IFRS 15 may lead to the drastic reduction in revenue recognised for certain businesses. And the list goes on.
In a nutshell, reporting under the existing standards will not create a bubbly picture one would hope to see in these dark times. The domino effect as a result of such information going public can be even more dangerous and shake market confidence while hindering post–Covid-19 recovery. People will think of hoarding whatever cash they have rather than investing it in a risky and scary-looking economy. So what should be the way forward?
Noncompliance with the reporting standards can be treacherous as it will give companies a loophole to exploit and misuse the circumstances.
However, some changes can be made in the way we report financial information during these unusual times. The current financial reporting framework does not have much scope to deal with unusual/exceptional circumstances. Modern human mind did not foresee such a calamity to devise a mechanism to deal with it. But now that it’s here, we need to fight it on all fronts.
One possible solution from the reporting perspective can be to prepare the income statement while “ignoring” the pandemic and arriving at the figure of PBITC — profit before interest, tax and coronavirus — rather than PBIT, which is profit before interest and tax.
This will give people an idea about the performance of the business precluding the Covid-19 impact. Using this figure, we can adjust all Covid-19–related losses and gains (if any), thus arriving at an actual profit/loss number. The benefit of this approach is that people will be able to see how financial results would look like in the post-Covid-19 era.
This approach is far better than the current reporting practices where all information is accumulated. Such a distinction will generate hope and provide people with confidence, which can lead to a much-needed boost to economic activities.
Similarly, Covid-19–specific financial information can be segregated across all reports. This will of course be a deviation from the existing financial reporting standards. But again, these standards were not designed for the pandemic era.
The writer is an academic based in Oman
Published in Dawn, The Business and Finance Weekly, July 20th, 2020