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.
