Accounting Theorizing under the Covid-19 Pandemic – a Realistic Diagnosis
By: Dr. Magdi Wael Al Kababji, Head of Accounting Department at Al-Quds Open University-
IASCA Member
JERUSALEM - Today, the world is witnessing accelerated developments due to the outbreak of Coronavirus (Covid-19) which led all the countries of the world to collectively seek crucial precautionary and preventive measures to limit the outbreak of this deadly virus and lessen its impact. Social distancing and quarantine are considered to be the most important procedures taken to limit the outbreak in addition to complete cessation of trade, banking, and travelling. Despite the importance of these measures it is clear that they have impacted the business environment in all the countries of the region. Covid-19 did not impact the human life only but also the entire global economy which required many professional organizations and international companies to measure and study the global financial impact of such a virus on the economies of these countries.
The reality of the impact of this pandemic on companies and the business environment also summoned most international accounting and auditing firms to the role of the International Financial Reporting Standards (IFRS) under the Covid-19 pandemic, given that the accounting and auditing profession is the actual translator for financial crises through the introduction of updates to laws and international standards related to accounting and financial statements in order to direct companies and corporations in general towards the correct and accurate guidance for current and future accounting treatments under the financial crises that overshadow the present and future.
Therefore, accounting and auditing firms have addressed, in their recent publications and updated reports, the potential accounting implications on financial reports under the Covid-19 pandemic. Businesses in addition to accounting and auditing firms should use as a guidance in preparing their financial reports.
And as we now witness the end of the financial period of 2019 and the beginnings of 2020, the International Accounting Standard-1 (IAS-1) calls for in many items and components to ensure the fair presentation of financial statements and serves users of financial statements in obtaining information that helps them understand the reality and the situation of businesses, and also assists them in forecasting the future cash flows along with their timing, and certainty. International companies tend, in their judgment about the existence of significant assurances and concerns at the management level due to the impact of Covid-19, to state that the company is unable to continue due to the intention of the management, either to liquidate the company or to halt operation, this is due to the appearance of almost certain cases in many economic establishments which shows the state of (essential uncertainty) about their ability to continue. This situation affects these entities' ability to overcome the crisis, unless they have successful future plans in place on which they can depend on in order to manage these circumstances. Therefore, using the going concern principle in such cases is inappropriate due to the expected effects of lack of liquidity, weak working capital, and low profitability ratios.
Therefore, the company's management must disclose this along with the reasons behind them. Entities should also provide other disclosures relevant to Contingent liabilities under IAS-37 along with providing disclosures about the objectives and policies of financial risk management. Also taking into consideration the cost of the provisions needed to implement contracts, liabilities and compensation of the inability to fulfill the obligations arising from contracts with clients or suppliers.
In addition, the view of the international accounting and auditing firms to IFRS-13 in relation to measuring the fair value of assets and liabilities which shows the companies under Coronavirus that the measurement should be done as on the reporting date not based on what’s going to happen in the future due to the outbreak of Covid-19.
Moreover, the international accounting and auditing firms should emphasize the importance of quantitative and qualitative disclosures about the Expected Credit Losses of financial assets that are not measured using the fair value in accordance with the impairment approach in order to enable the users of financial statements of understanding those risks caused by the epidemic in accordance with IFRS-9.
The costs of the provisions needed to achieve the actual current expected values along with the realizable values of the held financial assets on the date of financial statements should also be considered.
The importance of IAS-10 should be highlighted during the current period of the Covid-19 outbreak, because this standard addresses the events after the reporting period, which occur between the reporting date and the authorization date and affects the content of the financial statements. Some opinions tend to consider the Covid-19 pandemic as an emerging event under IAS-10 because it occurred after the reporting date of December 31, that’s why it is considered as a non-adjusting event since it does not reflect the circumstances on the reporting date.
Globally, the international accounting and auditing firms besides opinion-makers have been discussing the IFRS and other accounting and financial issues, such as IFRS-15, as this standard addresses the recognition of revenues, the crisis implications on the timing and value of revenue recognition, the need to modify the contracts with the clients, and the modification of the adopted pricing policies. IFRS-16, leases, has been also included in the discussions because of reconsidering the discounts rates, the implicit interest rates, and the interest rate bulletins issued by central banks.
In conclusion, and based on extrapolating financial reports and publications that indicated the increased degree of uncertainty and resorting to short and medium-term accounting and financial solutions due to the instability of the financial and monetary markets and the negative economic implications in all the countries, predicting financial solutions on the long run would not be easy.
The implications of Covid-19 on the economies of the dominant countries along with other countries, after the pandemic is contained, drive those countries to set financial, economic, and political strategies in the short run to handle the current and future circumstances. Businesses and firms should also study the potential accounting implications on its reality and financial statements, and should monitor the potential international changes in accounting along with measuring their effect on the interim financial reports of 2020 and the coming years. China, one of the world’s economic titans, stated “the world after Corona would not be the same as it was before Corona” … a statement that needs to be deeply considered.