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Covid Impact: 43 out of 153 listed entities avow pandemic’s material impact

Companies see impact on future revenues, costs and contracts due to Covid-19 crisis

, ET Bureau|
Last Updated: May 23, 2020, 10.39 AM IST
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However, most companies will have to determine these in the first quarter ending June.
Mumbai: The first flush of quarterly and year-end results show that the Covid-19 pandemic is impacting the accounting and financial reporting of listed companies after adjustments for loss of revenue, rise in costs and impairments were disclosed in their latest statement of accounts.

An ET analysis shows that out of the 153 listed entities that announced their annual results, 43 including-- HDFC Bank, Mahindra CIE, Adani Power and Axis Bank—have made adjustments in their books that are directly attributable to the Covid-19 crisis.

Areas where companies have to make future forecasts are witnessing maximum impact.

Especially in focus are subjects like revenue recognition, impairment, going concern qualifications, collectability of receivables, employee benefits and any contract modifications be it with vendors, customers or even employees.

In a lot of cases, audit reports may be modified if auditors don’t get sufficient audit evidence. For example, in case of booking credit losses the company might say that customer receivables are good but the auditors want evidence to support that claim.

After reviewing the first spate of results, SEBI on Wednesday has asked companies to evaluate the impact of the Covid-19 pandemic on their business and financials so that the investor can have more visibility on the true state of business.

“The accounting implications due to COVID-19 vary depending on the industry in which the company operates. Each industry has its own operating nuances including capital and financial structures, working capital requirements, credit cycles etc. Further a lot also depends on how robustly companies are managed within the sector,” said Khozet Kotwal, partner, Deloitte.

The results show that companies are testing all assumptions to make sure they are as realistic as possible while forecasting trading and cash flows and working capital requirements. Even the deferred tax assets and lending documents are being studied to get a grip on possible impact on company’s financials.

In some cases, auditors have even triggered going concerns in many companies—implying that these companies are struggling to survive. There was also a debate with auditors if many companies are only utilising Covid-19 crisis to write off or justify their earlier investment decisions.

Some of the companies such as Adani Power have even included loss arising out of cancellation of contracts due to triggering of ‘force majeure’ clauses.

“The Group has also received notices of ‘force majeure’ from four state distribution entities ("Discoms") which have been replied by the respective subsidiary entities and clarified that the said situation is not covered under force majeure clause, considering electricity falls under essential services vide notification dated March 25. 2020 issued by Ministry of Home Affairs,” the company said in its financials.

HDFC Bank too stated that it’s not proposing any final dividend in line with RBI’s guideline to conserve cash amidst Covid.

“The extent to which the COVID-19 pandemic will impact the Bank's provision on assets will depend on the future developments, which are highly uncertain, including among the other things any new information concerning the severity of the COVID-19 pandemic and any action to contain its spread or mitigate its impact whether government mandated or elected by the Bank,” Axis Bank said in its results.

A deep dive into the results shows that the accounting departments have had to consider the effect of market volatility, fluctuating valuations and financial risk, and in some cases, make changes to fulfil requirements of a few accounting standards as per an accounting advisory issued by ICAI.

Audit industry veterans point out that currently only large companies and banks are factoring the real impact of Covid-19 crisis in their financials.

However, most companies will have to determine these in the first quarter ending June.

Many companies have already started debating with their auditors on how methodologies to measure the correct impact of the business disruption.

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