The Impacts Of COVID-19 On Financial Reporting Of Nigerian Businesses And Their Going Concern

The Impacts Of COVID-19 On Financial Reporting Of Nigerian Businesses And Their Going Concern

It is no news again that the Corona Virus (COVID-19) pandemic continues to spread in many countries, Nigeria included. This crisis has significant economic effects on companies due to restrictions in production, trade and consumption, travel bans and few other reasons. These economic effects have an impact on financial reporting, accounting and auditing financial statements of the companies or businesses concerned. However, the impact on companies will differ and financial reporters will have to consider how it affects reporting and review them regularly. In this article, I will highlight some of these potential implications.

Financial Reporting is the disclosure of financial information to the various stakeholders (any individual or group of individuals who have keen interest in the organization and its activities) in an organization about the financial performance and position of the organization over a specified period. These reports serve various needs depending on the user. It provides information for management of the organization which aid them in making decisions, critical analysis and planning; it provide information to investors, creditors, debt providers etc. to enable them determine the historical performance of the organization in order to make rational decisions in terms of investment, credit, evaluation of the going concern of the organization and so on.

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A going concern is a business that functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period (the longer of the both). In Simple words, a going concern is the ability of a business to meet its financial obligations when they fall due. "Going concern" implies for the business the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS. Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations.Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity's liquidation becomes imminent.

Companies that would be affected adversely by the corona virus are small businesses or those in the areas of travel, leisure & hospitality and aviation. These aforementioned would certainly need to consider going concern issues. It would be safe to run several possible sensitivity analyses to determine whether there is any material uncertainty on its ability to continue as a going concern. If so, there would be need for additional disclosures. In some circumstances it may be necessary to consider whether it is appropriate to prepare the accounts on a going concern basis.

 After the lock down, businesses will either continue to bloom, have a recession or cease operation.

The further development, duration and impact of the corona virus cannot be predicted. In any case, financial reporters should remind companies of the various national initiatives for relief to companies.

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Financial Reporting is the end product of the accounting process. There are three major financial statements in a financial report, which are; Statement of Comprehensive Income; Statement of Financial Position and Statement of Cash Flows.

I would proceed to analyze how the lock down affects financial reporting. Though this might not be a very detailed analysis but if at all the lock down affects financial reporting, that means the three major financial statements would be affected.

The Statement of Comprehensive Income
This shows the financial performance of an organization by comparing the expenses and income generated for a particular period. It reveals the amount of profit the organization has made.  In the first quarter of this year, the hard blow of this COVID-19 lock down would basically be on companies in the aviation sector, transportation sector, hotels and other hospitality organizations and few others. There is going to be a huge down-turn on revenue generation because no one is traveling, everybody is basically in their respective homes, so who’s thinking of lodging in a hotel now? And the majority of their Revenue comes from when people travel, so no travel, no revenue. Every business that require the physical presence of their customers before they could deliver their goods and services therefore falls in this category of lesser or no income for this period. Social media companies, Online Service Providers and businesses that can work from home would stand to gain a lot because everyone has retired to social media and the internet in general. This is a break for most Nigerians away from work and the hustle at large, most people are either using this break to learn new skills or spend the whole day on social media. But either way, they are on the internet. Businesses that provide their services online without the physical presence of customers would have a significant increase in their revenue.

There is going to be a reduction in operating expense. Businesses are either working from home or not working at all. Expenses like maintenance of Plant and Machinery, Fueling, Repairs, Servicing etc. will not necessarily be incurred during this time. Not to forget that there are also some expenses that might have been incurred before the lockdown that will not be enjoyed or utilized and expenses that will be paid for at year end but has not been utilized or enjoyed fully during the year. Some companies pay subscriptions, rent etc. and most likely would have either paid their annual rent for year 2020 or will pay at the end of 2020 financial year, either way there won’t be a reduction in the rent expenses because the rented space was not utilized for a particular period. Also, there be would great increase in expenses on data as everyone working from home does that through the internet. Lastly, Full year depreciation would still be charged at year end without pro-rating for the isolation period.

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We can see here that there is a decline/increase in revenue and an increase/decline in expense as well, so they might actually even out, if that be the case, good for them, but if not, if the expenses decline and revenue also declines at a greater rate then there is bound to be a huge reduction in profit at year end, otherwise, there would be an increase in profit at the end of the year. New businesses are definitely prone to incurring a loss at this period unless they are into online services.

The Statement of Financial Position
As the name implies shows the financial position of the organization in terms of its assets and liabilities. ‘Events after the end of the reporting period’ include all events up to the date when the financial statements are authorized for issue. The general requirement is that it reflects the position at the end of the reporting period. Nigerian businesses with a 31 December 2019 year-end would therefore regard the emergence of corona virus as a non-adjusting event, since the outbreak occurred midst of January 2020. The nature of any material non-adjusting event and an estimate of its financial effect must be disclosed by way of note. Therefore, companies need to consider the impact of the corona virus on their business, which will vary according to the specific circumstances in which it operates. This includes that the disclosures articulate potential impact in the next reporting period.

As we progress through 2020, more information will come to light on the scale and impact of corona virus. There might be a greater degree of judgment required when identifying the conditions at balance sheet dates after 2019, and therefore assessing whether the developments are adjusting or non-adjusting events. The corona virus is ordinarily an adjusting event for any reporting period ending as from 31 January 2020.

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Looking at the impacts on certain line items, starting with assets, PPE to be precise. The book value of PPE would be reduced as full year depreciation would be charged irrespective of the fact that the PPE is not put into use for certain period. For manufacturing companies, it will be difficult to work from home; as a result, there will be a great decline in their inventory. Some of these manufacturing companies get their raw materials from other countries, this is now impossible as the nation’s borders are closed.  A lot of companies in this pandemic might not be able meet up their short term liabilities (trade payables, due loan notes etc.), businesses will only be kind of lucky if their receivables pay up their accounts (depending on their receivable period policy).

The Statement of cash flow
This statement gives an insight into how liquid an organization is by matching its cash inflows against its outflows. Companies would be recording a lot of bad debts as debtors most likely would not be able to pay up their debts; this poses liquidity threat to the organization. Interest rate in this period is not very favorable for financing activities; despite this companies might still have to engage in borrowing (Loan) to meet short term obligations. Companies that have obtained loans before the pandemic for certain purposes would still pay a full year interest on these loans, of which they might still end up using for other purposes as they work from home. Companies that can work from home would surely have higher cash inflows than outflows and other companies otherwise. For manufacturing companies that cannot produce from home, that means no sales for them resulting in reduction of cash inflow.

Samuel Abayomi, AAT.

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