Thematic | April 2020
Refer our earlier reports
Accounting impact of COVID-19 situation
Effect widespread across sectors
The COVID-19 situation has significantly impacted economies and their financial
markets globally. As Indian companies approach the financial year end, it is important
to evaluate the impact of this situation on
Our discussions with various accounting experts indicate the level of impact will
depend on the industry under which the company operates as well as company-
specific exposure to financial instruments/transactions.
On the accounting front, this would not only impact key financial statements (income
statement and balance sheet) but could also raise questions on the going-concern
assumptions of some entities.
The outbreak, followed by lockdown, would not only have an immediate impact due
to reduced activity levels but also potentially change various accounting estimates
(leading to an increase in write-offs, expected credit loss/provisioning, the fair
valuation assessment of various assets and liabilities, and revenue recognition, among
Furthermore, this could result in various contracts
such as those pertaining to lease
accounting, revenue recognition, and onerous provisioning
being changed (in some
cases due to the invocation of force majeure clauses). Some sectors may even witness
a plunge in the selling price of certain goods or their obsolescence leading to inventory
We believe that some companies may, however, consider these situations to be
transitory and choose not to make any significant changes in their long-term
estimates. Nevertheless, the companies will be required to make more robust
disclosures on estimates/judgments used in preparing the financial statements.
This is likely to have a significant impact on financials, automobile, retail,
commodities, hotels, media, aviation, capital goods and infrastructure sector, among
Automobile, hotels, retail, commodities may witness asset impairment
Companies in significantly impacted sectors such as automobiles, hotels, retail,
metals, and oil & gas (upstream companies) may see disruptions due to lower
demand and realizations. These factors may act as indicators that could trigger the
impairment test for their non-current assets; on the other hand, goodwill and
intangible assets with infinite life (as required by Ind-AS) would continue to have
their annual impairment check, albeit with more stringent parameters.
ECL provisioning could impact financials, capital goods, automobile, IT
Financial instruments (covered under Ind-AS 109) such as loans, trade and other
receivables, investments in debt instruments, financial guarantees, and loan
commitments are subject to impairment loss, measured as per expected credit loss
approach in the income statement. Sectors such as financials (NBFC), capital goods,
autos (for their captive financing book), and IT are exposed (primarily in
loans/receivables) to sectors/companies that may be affected by the COVID-19
situation. Banks (yet to migrate to Ind-AS) are likely to witness an increase in NPA
provisioning as per the
RBI’s prudential guidelines.
Sandeep Ashok Gupta
(S.Gupta@MotilalOswal.com); +91 22 6129 1551
(Umesh.Jain@MotilalOswal.com); +91 22 7193 4221
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.