The Institute of Chartered Accountants of Bangladesh has asked its members to consider the potential impact of coronavirus pandemic on financial reporting and auditing in regard to displaying fair and real picture of companies’ business.

The ICAB, after holding a discussion with the Financial Reporting Council, has prepared a guideline and sent it to all members asking them to take precautionary measures to overcome various challenges in preparing reliable financial reports during the coronavirus days.

COVID-19 has put a devastating effect on global trade, commerce and industry with consequential implications on financial reporting by the affected entities and audit of financial statements of those entities, it said.

Most of the companies remain shut or partially open after the government declared general holidays from March 29 to May 5 to reduce risk of coronavirus infection in the country.

The pandemic has an impact across all financial elements — assets, liabilities, income and expenditure — both present and future, it said.

Given the circumstances, the preparation of reliable forecast information can be challenging and needs to be closely monitored as this can have a pervasive impact across multiple elements of financial statements.

Each entity needs to re-assess their credit risk and uncertainty of future cash flows, potential insolvency of the customer and other related factors to calculate the provision for impairment of financial assets.

For those entities having December 31, 2019 year-end, primary consideration should be going concern assessment due to subsequent impact of COVID-19 and related disclosure as most of likely COVID-19 impact would be a non-adjusting event at the reporting date, the letter said.

For those entities with year-end on March 31, 2020 or even June 30, 2020, all COVID-19 impacts are adjusting events, requiring appropriate consideration, the ICAB guideline mentioned.

While conducting going concern assessment, the entity needs to specifically consider the extent of operational disruption, potential reduction in demand for products, potential liquidity and working capital shortfalls and access to existing sources of capital.

If events or conditions have been identified that may cast significant doubt on the entity’s ability to continue as a going concern, the auditor must obtain sufficient appropriate audit evidence to determine whether or not a material uncertainty exists.

Due to the lower demand for products, many entities would reduce its operation and some may have closed the operation altogether, resulting in lesser utilisation of capacity and hence potential impairment of property, plant, and equipment.

Many entities will renegotiate the terms of existing contracts and arrangements, and even cancel contracts/orders.

Many overseas buyers of local RMG and textile products abruptly cancelled or deferred confirmed orders.

In addition, contract modifications may result from changes in terms of financial assets and liabilities, leases, compensation arrangements with employees.

Since inventories must be measured at lower of cost and net realizable value, the subsequent reduction in selling price of goods or cancellation of customer orders may indicate a lower net realizable value of related inventories and hence a write-down may require.

A delay in fulfilment of contractual obligations may result in penalties or compensation claims unless otherwise protected and need to be provided for.

An entity taking insurance policy may need to assess whether it is entitled to any claim/ compensation from business disruption.

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 suffcient appropriate audit evidence.

There is a risk that if the spread of the outbreak is not contained by June, 2020, there are some key assumptions that would require modification with possible impairment charges, the auditor can issue audit report with an emphasis of matter paragraph.

Due to COVID-19 related matters, the auditor may not be able to receive direct external confirmations from banks, debtors, lawyers and suppliers for external confirmations and in those cases, the auditor needs to consider whether alternate audit procedures can be applied.

In addition, the auditor must evaluate and review whether there is indication of possible management bias in making those estimates.

However, despite all efforts, if any disagreement persists and there are no alternatives, the auditor may consider modification of the audit report in accordance with ISA 705.