Key Steps accountants should take to guide SMEs out of the Covid-19 Crisis

Business survival tips, strategies for businesses during covid-19 crisis, accounting consultancy in Dubai

In the present situation where the whole world has come to a stop, it is now more important than ever to have savings in hand. There will be a massive impact felt due to the coronavirus, and businesses need to be ready for any situation which comes their way. It is because of this reason that outsourcing the accounting functions of a company will be more beneficial for the management.

Accountants – for many – are SME’s trusted advisors.

The Covid-19 crisis is a critical time where SMEs need all the guidance they can get to navigate through the storm. We call on accountants and small accountancy practices to help struggling SMEs through these difficult times.

The following actions are required to be taken by accountants to support their struggling SME clients:

1. Informing clients about all aid options

Accountants should be aware of all financial (and other) forms of aid provided by national governments. It would be helpful for the national accountancy body to be aware of aid that other countries provide, so they can flag the best practices to their own national policymakers.

2. Applying the available aid to client’s situations

Identify clients in high risk sectors and those that would benefit most from public support measures. Help them by:

  • Advising them on, and guiding them through, all the claims available to them
  • Identifying options to help them diversify their business
  • Providing a path to accessing emergency financing being provided by governments
  • If possible, consider renegotiating your fees and payment schedules with them

3. Helping with immediate business survival

One of the ways in which accountants can help is by informing their SME clients of immediate measures that might make the difference between survival and collapse. They should also help them implement these measures where required. Examples of this include:

  • Accessing the reliefs on offer as soon as possible to increase the impact.
  • Reviewing and adjusting their cash flow forecast to determine what impact cuts in sales will have on their ability to pay their suppliers and debt. Businesses should continue to pay their suppliers when they can to help avoid a wide-spread collapse of the financial system.
  • Considering the business model to ascertain whether the SME can deliver goods or services in an alternative manner – such as by home delivery or online, and whether it can downsize or stop certain activities, such as travel, sales and marketing.
  • Understanding their supply chains and planning for disruptions in the supply of products and services. This may involve scaling back production for some parts and stock and re-considering suppliers and clients from countries heavily impacted by the virus.
  • Checking their insurance to understand whether they are eligible for a claim for any financial losses.
  • Communicating with their staff to discuss the possibility of short term pay cuts.
  • Ensuring that their financials are up to date so they can monitor profitability, stock, and debtor-creditor balances. Many governments are offering deferment of tax returns and financial information filing. However, such deferments’ long-term impacts are not clear. They could result in a later bottleneck in filing such returns and the possible loss of financial and tax data.
  • Negotiating with their debtors- for example, to offer discounts in exchange for early payment.
  • Negotiating with their debtors– for example, to offer discounts in exchange for early payment.
  • Continually monitoring the situation and informing clients of new initiatives so that when lifting the restrictions becomes imminent, they are ready to recommence trading.
  • If all else fails, considering the options within insolvency as it may be possible to rescue viable businesses by debt reorganization rather than being forced into full liquidation.

4. Guiding SME’s plan for the medium term

Many SMEs are likely to be in a crisis mode. Our accountants help them avoid emergency measures that could endanger the business’ medium-term viability. They can, for example, help them to:

  • Reconsider whether laying off employees is unavoidable. On top of having negative social and societal impacts, cutting down on workforce also constitutes a loss of key skills for the business. This should be a last resort option only, so make your clients aware of that and help them access all alternative options, aid and financing available first. It is possible that staff would prefer taking a temporary pay cut over redundancy. This could increase staff loyalty and allow the business to resume operations once the restrictions are lifted.
  • Start building financial reserves as soon as possible, to prepare for a new peak in coronavirus cases even after the current restrictions are lifted.

Accounting For COVID-19-Related Rent Concessions

Accounting and Bookkeeping services in Dubai, accounting for covid-19 rent concessions, IFRS-16 amendment

COVID-19-Related Rent Concessions for Lessees, published by IASB on May 28, 2020:

Purpose:

As a result of the COVID-19 pandemic, many lessors are providing rent holidays / concessions to lessees.

Rent Concessions can be in the form of rent waivers, lease payment deferrals or one-off rent reductions. Prior to the amendment, such concessions may fall within the ambit of lease modifications.

What is a lease modification?

IFRS 16 defines a lease modification as:

“a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease.” A lease modification results from renegotiations between the lessee and lessor.

Examples of lease modifications include (but are not limited to):

  • reducing or extending the contractual lease term;
  • hiking or lowering the lease payments; or
  • adding or removing the right to use one or more underlying assets.

Separate lease:

If a lease modification creates a separate lease, the lessee makes no adjustments to the original lease and accounts for the separate lease the same as any new lease.

Not a separate lease:

For a modification that is not a separate lease, the lessee’s accounting depends on the nature of the modification.

Lease Modifications – Amendment:

The following amendment makes it easier for lessee to account for COVID-19 related rent concessions as “not a lease modification” by exempting him to consider/evaluate the individual lease contracts to determine whether rent concessions are a lease modification or not as a direct rule with a criteria prescribed”.

Practical Expedient:

The accounting for lease modification is seemingly complex. It envisages the recalculation of lease assets and lease liabilities / (payments) using revised discount rates.

In order to simplify the Lessee Accounting for rent concessions, the International Accounting Standards Board (IASB), has proposed some amendments as a practical expedient:

All the following three conditions are required to be met for permitting a lessee to apply the practical expedient:

  • As a result of revised consideration, the change in lease payments is substantially the same or less than the original consideration; AND
  • the reduction in lease payments affects only payments, originally due on or before June 30, 2021; AND
  • there is no substantive change to other terms and conditions of the lease.

Lessee:

  • Thus, the proposed practical expedient obviates the need for lessees to carry out an assessment to decide whether a COVID-19 related rent concession received is a lease modification or not.
  • The lessee accounts for the rent concession as if the change was not a lease modification. Such rent concessions would generally be accounted for as a variable lease payment.
  • In this case, a lessee applies paragraph 38 of IFRS 16 and generally recognises the effect of the rent concession in profit or loss.

Lessor:

  • No practical expedient is provided for lessors
  • Lessors are required to continue to assess as if the rent concessions are lease modifications and account for them accordingly.
  • In case of operating lease, the lessor recognises the effect of the rent concession by recording lower income from leases.

Disclosure Requirements:

Lessees applying the practical expedient are required to disclose:

  • that fact, if they have applied the practical expedient to all eligible rent concessions and, if not, information about the nature of the contracts to which they have applied the practical expedient; and
  • the amount recognised in profit or loss for the reporting period arising from application of the practical expedient.

The information disclosed will need to be sufficient to enable users of financial statements to understand the impact of COVID-19-related changes in lease payments on the entity’s financial position and financial performance (paragraph 31 of IAS 1).

Effective date:

The amendments are effective for periods beginning on or after June 01, 2020, with earlier application also permitted in Financial Statements not authorized for issue at May 28, 2020.

Transition:

A lessee applies the amendments retrospectively and recognises the cumulative effect of initially applying them in the opening retained earnings of the reporting period in which they are first applied.

The disclosure requirements of Paragraph 28(f)1 of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors do not apply in the reporting period in which a lessee first applies COVID-19-Related Rent Concessions.

ESR Filing Deadlines

ESR Filing requirement, ESR deadline

For ease of reference we have set out below details of the requirements to notify as communicated by the selected regulatory authorities, together with the deadline:

Regulatory Authority Who is required to file Deadline
ADGM Only entities/ licensees that are carrying out relevant activity By 30 June 2020
DAFZ All entities/ licensees, including those who do not undertake relevant activity By 15 June 2020 (extended from 31 May 2020)
DMCC All entities/ licensees, including those who do not undertake relevant activity By 30 June 2020
RAK ICC All entities/ licensees, including those who do not undertake relevant activity By 30 June 2020
Securities and Commodities Authority (SCA) SCA have contacted via email all Investment Management Firms, Management Company Firms regulated by SCA requesting submission of the notification form By 30 June 2020 (extended from 31 March 2020)
AJMAN FZ All entities/ licensees, including those who do not undertake relevant activity By 30 June 2020
RAK EZ All entities/ licensees, including those who do not undertake relevant activity By 30 June 2020
Dubai World Trade Centre Only entities/ licensees that are carrying out relevant activity By 30 June 2020
Dubai Aviation City Corporation All entities/ licensees, including those who do not undertake relevant activity By 23 June 2020 (extended from 7 June 2020)
Dubai Healthcare City (DHCC) Only entities/ licensees that are carrying out relevant activity By 7 June 2020 (extended form 31 May 2020)
Ministry of Economy Only entities/ licensees that are carrying out relevant activity By 30 June 2020
Hamriyah Free Zone Authority (HFZA) Only entities/ licensees that are carrying out relevant activity By 30 June 2020
Sharjah Airport International Free Zone (SAIF) Only entities/ licensees that are carrying out relevant activity By 30 June 2020
International Free Zone Authorities (IFZA) Only entities/ licensees that are carrying out relevant activity By 30 June 2020
Dubai Silicon Oasis (DSO) All entities/ licensees, including those who do not undertake relevant activity By 9 June 2020 (extended from 31 May 2020)
Dubai Development Authority (DDA) Only entities/ licensees that are carrying out relevant activity By 25 June 2020
Abu Dhabi Media Zone Authority All entities/ licensees, including those who do not undertake relevant activity By 30 June 2020
Umm Al Quwain Free Trade Zone (UAQ) All entities/ licensees, including those who do not undertake relevant activity By 30 June 2020
Fujairah Freezone All entities/ licensees, including those who do not undertake relevant activity By 15 June 2020
KIZAD All entities/ licensees, including those who do not undertake relevant activity By 20 June 2020
Jebel Ali Freezone (JAFZA) Only entities/ licensees that are carrying out relevant activity By 30 June 2020

Please contact Tanmay@affiniax.com if you wish to find out more or require assistance with your notification requirements.

Accounting of Unexpected COVID-19 related Costs

Accounting and Bookkeeping Services, Accounting and Bookkeeping Companie, accounting for unforeseen expenses, accounting treatment of covid-related expenses

HOW TO ACCOUNT FOR UNEXPECTED COSTS RELATED TO COVID-19

COVID -19 has taught us a new lifestyle as well as new business structures. Staying at home and social distancing is becoming a part of our day-to-day life. Every business and every person has been affected by this epidemic and it will go down in history as an event that paused the economy and the beginning of a new culture.

In addition to various financial impacts being felt due to COVID-19, we must consider the unexpected/unusual expenses and their classification. Nowadays, every organisation requires a restructured business model. Most businesses would be remodelled and relaunched as a part of a turnaround strategy to recover all the financial impacts. Let us discuss the major unusual expenses that would affect cash flow due to COVID-19.

  • Cost related to digital ecosystem: As we know, most of the countries have imposed lockdown in order to reduce the spread of COVID19. Due to this, majority of the companies have implemented a remote working model in order to continue operations. Cost incurred for implementing remote working such as IT Consultation, related hardware installations, etc. can be considered as restructuring costs and treated accordingly.
  • Costs related to Inventory: Verification and valuation of inventory would be required before re-opening the regular activities of trading and manufacturing companies. Companies may require additional manpower for the verification of inventories, an inevitable cost. Due to the lapse in time, there is a high chance of goods being found to be unfit for sale, which may lead to high abolishment costs. Valuation is required because it reduces risk and return of goods. High maintenance cost of inventory may also be incurred due to lockdown.
  • Supply chain interruption: Production delays due to supply chain interruption would be a major cost which adversely affects the overall operation and the cash flow of the business.
  • Marketing expenses: Remodelling and recovery of business stability would be a great challenge, especially during the initial phases. Door to door communication may not be allowed and hence marketing divisions should be more focused on online marketing. Customer relationship expenses will also be part of this.
  • Sanitisation costs: As it may take more time to fully recover from COVID-19, cost of sanitisation will continue, at least in the short-term.

Accounting Treatment

When items of income or expenses are material, an entity shall disclose their nature and amount separately (IAS 1:97). An entity shall present additional line items, headings and subtotals in the statement(s) presenting profit and loss and other comprehensive income when such presentation is relevant to an understanding of the entity’s financial performance (IAS 1:85). However, an entity shall not present any items of income or expenses as extraordinary items, in the statement(s) presenting profit or loss and other comprehensive income or in the notes (IAS 1:87).

According to IAS 1:86, because the effect of an entity’s various activities, transactions and other events differ in frequency, potential for gain or loss and predictability, disclosing the components of financial performance assists users in understanding the financial performance achieved and in making projections of future financial performance. An entity includes additional line items in the statement(s) presenting profit or loss and other comprehensive income and it amends the descriptions used and the ordering of items when this is necessary to explain the elements of financial performance. An entity considers factors including materiality and the nature and function of the items of income and expense.

Based on these explanations in IAS 1, we can conclude that the overall effect of COVID-19 can be accounted separately if the total expenses are material, as decided by the management. If the expenses incurred are not material, it should be accounted within the appropriate heads of accounts itself. For e.g If there are any additional expenses (which are immaterial) related to marketing, it should be part of marketing expenses. Similarly, if there is any restructuring cost which is material, an entity shall disclose it separately under appropriate head.