Impact of COVID-19 on Revenue Recognition
COVID-19 pandemic is affecting worldwide major economic and financial markets, and virtually all industries and governments are facing challenges associated with the economic conditions resulting from efforts to address it. For example, many industries i. e. travel, hospitality, leisure, Education, and retail industries have seen sharp declines in revenues due to regulatory and organizational mandates and voluntary changes in humanbehavior. To address these economic challenges, some governments are pursuing laws or other related initiatives.
This article discusses certain key revenue reporting considerations under Ind AS 115 – Revenue from Contracts with Customers
As a result of business disruptions associated with the COVID-19 pandemic, an entity may be prevented from entering into customer agreements through its normal business practices, which may make the determination of whether it has enforceable rights and obligations challenging. Since many customers are experiencing financial difficulties and liquidity issues, an entity may need to carefully assess the collectability of its customer arrangements and consider changes in estimates related to variable consideration (e.g., because of greater returns, reduced usage of its products or services, or decreased royalties).
Below are some points to help out to customer and entity as will:-
To help customers, entity may (1) revise its agreements to reduce any purchase commitments; (2) allow customers to terminate agreements without penalty; (3) provide price concessions.
The entity itself may be experiencing financial difficulties and supply disruptions, it may (1) request up-front payments from its customers; (2) delay the delivery of goods or service without penalty clause; (3) may terminate agreements which have penalty clauses ; or (4) provide price concession to customer . Therefore, as a result of the changes in circumstances experienced by both an entity and its customers due to the COVID-19 pandemic, an entity may need to consider the above when assessing revenue from contracts with customers:
FAQs on ‘Eligibility of CSR expenditure related to COVID- 19 activities’ stands issued
The Ministry has been receiving several references/ representations from various stakeholders seeking clarifications on eligibility of CSR expenditure related to COVID-19 activities. In this regard, a set of FAQs along with clarifications are provided below for better understanding of the stakeholders:
| Contribution made | Whether Qualify for CSR |
| PM CARES Fund | Yes |
| Chief Minister’s Relief Funds’ or ‘State Relief Fund for COVID-19’ | No |
| State Disaster Management Authority | Yes |
| spending of CSR funds for COVID-19 related activities | Yes |
| payment of salary/wages to employees and workers, including contract labour, during the lockdown period | No |
For more details refer http://www.mca.gov.in/Ministry/pdf/Notification_10042020.pdf
Physical Inventory Verification -Key Audit Considerations amid COVID-19
Its Management responsibility to verify the Inventory physically every year end to ensure its existence, Condition and valuation.
As per the Companies (Auditor’s Report) Order, 2016 (CARO 2016), auditors arealso required to commenton “physical verification of inventory”. Hence its responsibility of Auditors as well to ensure Physical verification has been conducted by Management during the year.
AS per SA 501 ( AuditEvidence – Specific Considerations for Selected Items) specify the procedures to be adopted by the Auditors to conduct the Physical Inventory and to ensure all the Inventory assertion i.e Existence, Conditions and valuation.
Due to announcement of Lockdown before year end dated March 24, 2020, Management and Auditors were not able to conduct Physical Verification as at year end. To mitigate the inventory risk ICAI has issued guidance note on Physical Inventory Verification Key Audit Considerations amid COVID-19, below are summary of Guidance note:-
AUDITOR’S CONSIDERATIONS IN VARIOUS SCENARIOS
- Management unable to conduct physical inventory counting as on the date of financial statements:-
If management is unable to conduct physical inventory as at Balnce sheet date, Management should inform to Auditor the reasons for not conducting the Physical Inventory count.
- Physical inventory counting conducted by management at a date other than the date of financial statements:-
Physical verification conducted by management at a date other than Closing date which my be date prior to year end or a date later to year end. In these cases Auditor has to perform his duties and apply roll-forward and roll- back procedure to arrive at year-end inventory.
- Alternative audit procedures where it is impracticable for auditors to attend physical inventory counting:–
Various restrictions imposed by Government due to COVID-19 outbreak, in most of the cases it could be impracticable for auditors to physically attend the inventory counting. In such cases, the auditor would need to comply with the procedures given in paragraph 7 of SA 501 read with paragraphs A12 to A14 of SA 501. For Reference of SA 501 refer link https://resource.cdn.icai.org/18134sa501_rev.pdf
If attendance at physical inventory counting is impracticable, the auditor shall perform alternative audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition of inventory. If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance with SA 705(Revised). (Ref: Para. A12-A14)
The use of alternative audit procedures may include one or more of the following:
- Using the work of internal auditor
Where it is impracticable for Auditor to physical attend the inventory count audit may rely on work performed byInternal Auditor as permitted by Paragraph A16 of SA 610(Revised), “Using the Work of Internal Auditors” states as below:
“Examples of work of the internal audit function that can be used by the external auditor include observations of inventory counts.”
- Engaging other Chartered Accountant(s) to attend physical verification
Due to lockdown restrictions imposed by the Government, the auditor is not able to attend the physical verification of inventory,the auditor in discussion with the management may appoint other Chartered Accountant(s), who is local resident of the location of the entity’s warehouse/ factory/ inventory, to observe the physical counting
- Use of technology in inventory counting
This is the probably 1st time in history where ICAI allowed to Auditors to use of technology for conducting physical verification on inventory.
In certain situations where physical attendance by auditors at inventory counting is not possible, they may be able to observe the inventory counting remotely via video call with the help of technology. Auditors would need to ensure the security on these applications i.e. Virtual attendance
For more details refer link:-https://resource.cdn.icai.org/59498aasb48418.pdf