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i need answer for this question:

what assumptions capital budgeting are making and whether this COVID-19 business has materially affect even their longer-term projections.?

Answer 1

Answer:

Introduction:

The novel coronavirus (COVID-19) pandemic presents huge challenges for preparers of financial statements. Here are 5 financial reporting issues to consider

Assumptions capital budgeting:

Companies will need to look out for further regulatory updates and to monitor the current and potential effects that the coronavirus will have on their financial reporting. There will be a number of areas for discussion, but five issues will be priorities: Going concern and liquidity; Impairment assessment; Contract modifications; Fair value measurement; and Government Assistance and income tax.

1. Going concern and liquidity

Understandably, management affected by the crisis will be concerned about the survival of their organizations. And the key will be cash flow – does the business have enough cash to survive the next six to 12 months?

When preparing financial statements, management has to make an assessment of a company’s ability to continue as a going concern, and whether the going concern assumption is appropriate. In the current circumstances, management will need to consider the existing and anticipated effects of the coronavirus outbreak on activities in its assessment.

Given the unpredictability of the potential impact, there may be material uncertainties that cast doubt on the company’s ability to operate under the going concern basis. If the company, nevertheless, prepares the financial statements under this assumption, it must disclose these uncertainties.

The degree of consideration required, the conclusion reached, and the required level of disclosure will depend on the circumstances in each case, as not all companies will be affected in the same manner and to the same extent. Significant judgment and continual updates to the assessments may be required given the evolving nature of the outbreak.

Understandably, management affected by the crisis will be concerned about the survival of their organizations. And the key will be cash flow.

2. Impairment assessment

At the end of each reporting period, companies are required to assess whether there is any impairment for nonfinancial assets. An asset is impaired when a company is not able to recover its carrying value, either by using it or selling it.

The adverse impact on companies caused by measures to stop the spread of the disease, such as temporary manufacturing plant closures and travel and import/export restrictions, can be considered an impairment indicator.

When assessing impairment, companies are required to determine the recoverable amounts of the assets. This calculation requires an estimate of expected future cash flows and expectations about variations in cash flows. The forecasted cash flows should reflect management’s best estimate of the economic conditions that will exist over the remaining useful life of the asset.

With the current situation, significant challenges are expected as to whether the forecast of budgets for future cash flows can be supported by subsequent performance. The more the current environment is uncertain, the more important it is for the company to provide detailed disclosure of the assumptions taken, the evidence on which they are based and the impact of a change in key assumptions.

3. Contract modifications

Companies affected by the COVID-19 outbreak may experience cash flow challenges as a result of disrupted operations, higher operating costs or lost revenues. They may need to obtain additional financing, amend the terms of debt agreements or obtain waivers if they no longer satisfy debt covenants. In such cases, they will need to consider whether any changes to existing contractual arrangements represent a substantial modification or potentially a contract extinguishment.

There are also consequences for lenders. Financial institutions, such as banks and insurance companies, are being asked to help borrowers by providing relief on cash-flow obligations. These will be considered contract modifications and will require institutions to think about the measurements of their loan portfolio and expected credit losses. Similarly, real estate companies will have to consider the consequences if they provide relief to lessees on rents.

4. Fair value measurement

Companies are required to measure some of their assets and liabilities at fair value. This is a date-specific exit price estimate based on assumptions that market participants would make under current conditions.

When making assessments and judgments for measuring fair value, the company should consider the conditions and corresponding assumptions that were known or knowable to market participants. The fair value measurement (FVM) impact would depend on the evaluation of whether the severity of the outbreak at the reporting date would have impacted participants’ valuation assumptions at that time.

Companies will also need to consider making related disclosures that could reasonably be expected to influence decisions that the users of general-purpose financial statements would make on the basis of those financial statements. Disclosure may be needed to enable users to understand whether or not the outbreak has been considered for the purpose of FVM. Users should understand the basis for selecting the assumptions and inputs that were used and the related sensitivities.

5. Government assistance and income tax

Part of the response by governments to the coronavirus outbreak has been to introduce support measures for individual industries along with wider economic stimulus packages. These measures include direct subsidies, tax exemptions, tax reductions and credits, extended expiry period of unused tax losses, reduction of public levies, rental reductions or deferrals and low-interest loans.

These will all have an impact on financial reporting. Relief measures may fall within the scope of the standards on income tax, on government grants, on leases or financial instruments and the accounting may be different in each case.

One important factor to consider when accounting for any income tax consequences is whether the government concerned has substantively enacted the relevant law. Companies will need to determine whether changes to tax rates and laws were substantively enacted as of the reporting date. The characteristics of any tax relief or rebates need to be assessed to determine whether they should be accounted for as a reduction to income tax expense or the receipt of a government grant.

Timely and meaningful disclosures about the potential effect on the company’s financial position, performance and viability, as well as measures taken to manage risks, are important to regain trust.

Regaining trust in turbulent times

We are living in unprecedented times on a global scale. Timely and meaningful disclosures about the potential effect on the financial position, performance and viability of the company, as well as measures taken to manage the risks, are important to regain trust. Financial reporting can play an important part in the communication between companies and their stakeholders in this turbulent period.

• Download IFRS accounting considerations of COVID-19

  Summary

Companies need to monitor the current and potential effects that the novel coronavirus (COVID-19) will have on their financial reporting. Timely and meaningful disclosures about the potential effect on the financial position, performance and viability of the company, as well as measures taken to manage risks, are important to regain trust. Five issues will be priorities: going concern and liquidity; impairment assessment; contract modifications; fair value measurement; and government assistance and income tax.

While these are no doubt tumultuous times, I want you to know that we have taken, and will continue to take, the steps we believe are necessary to uphold our purpose: Building a better working world.

We’ve also been helping personnel who were infected, assisting impacted communities, and using local public health guidance to inform our working from home and social distancing policies.

In this extraordinary time, we continue to support clients by:

• Working to maintain audit quality
• Fulfilling our delivery commitments
• Offering advice and counsel as needed
• Engaging with global and local regulators
• Focusing on the resiliency of our global delivery systems

Finally, I know that many of you and your businesses are going through very difficult times. Please know that all of EY stands ready to support you and your people as we Build A Better Working World. Together.

• COVID-19: Board oversight during times of uncertainty

Through calm and steady guidance, board members can provide clarity and confidence in times of uncertainty.

In March 2020, the World Health Organization designated COVID-19 to be a pandemic, threatening the health and well-being of large numbers of people across multiple countries. The global outbreak has caused escalating levels of societal uncertainty, and by creating disruption of business continuity across all industries, it is predicted to destabilize financial markets and threaten global economic stability for an unknown duration.

With management focused on addressing the impacts of the COVID-19 crisis on the company’s operations, financial condition and stakeholders, it is imperative that the board enhance its efforts to provide strategic insight, oversight and foresight across short- and long-term horizons while continuing to exercise its fiduciary responsibilities.

We offer the following considerations for board members as they navigate this crisis:

• Clearly communicate a strong tone from the top; model desired attitudes and behaviors; and validate that crisis-related decisions, actions and communications are consistent with the company’s purpose, culture and values.
• Maintain appropriate protocols and information flow with management and external advisors and remain flexible with board operations and schedules so that the board can receive timely information that allows for open communication and effective deliberation and oversight.
• Support transparent and clear communications to stakeholders regarding company developments to guide decision-making, maintain trust and protect the company’s reputation.
• Obtain timely updates related to the company’s emerging risks and material threats, vulnerabilities and potential impacts (as identified by the company’s ERM program), and adjust risk appetite and tolerances accordingly.
• Determine whether the company’s financial scenario planning and stress testing are designed to adequately assess the levels of liquidity, credit and capital needed over relevant ranges; confirm that appropriate communications are occurring with financial intermediaries.
• As management continues to address employee and customer health, safety and morale, confirm that management is appropriately dealing with emerging legislative, administrative and regulatory developments, stimulus opportunities and developing practices.
• Verify that management is taking the appropriate actions to identify and manage material contractual commitments, insurance agreements, covenants and other obligations from both a legal and practical business perspective.
• Provide strategic guidance and support to management related to social and economic welfare initiatives that may involve short-term costs but deliver long-term value through improved social outcomes and enhanced corporate trust and reputation.
• Continuously challenge the scope, composition and decision-making authority of the company’s crisis management team to enhance its capabilities and effectiveness. Confirm that the team’s work is appropriately balanced between short-, medium- and long-term responses to the crisis.
• Continue to evaluate the company’s business continuity and contingency plans for the appropriate levels of redundancy, supply chain resiliency and effectiveness of third-party service providers to allow for the continuation, or quick recovery, of critical business functions.
• As companies shift to alternative and remote working arrangements, reassess key communication, operational and financial systems to confirm IT resiliency and appropriate levels of cybersecurity and data privacy, and that key controls are operating as intended.
• Confirm that management is continually monitoring the effectiveness of internal controls over financial reporting and disclosure controls and procedures (as well as events or factors that may result in material changes in financial statement reporting and disclosures) to enable the company to meet regulatory requirements for financial and other public disclosures and broader stakeholder demands for material information.
• As business models are adjusted to address the crisis in the short term, challenge how those changes uncover new opportunities along with operational effectiveness and efficiencies over the long term.
• Once the crisis is mitigated, conduct postmortems and assess lessons learned, including how the company’s business continuity plan is working and what actions the company needs to take to help build resiliency for future events.

The COVID-19 pandemic highlights the need for effective risk and crisis management programs to address extreme and unexpected events. Boards play a crucial oversight role with such challenges given their collective experiences with other crises and overall business judgment. Boards can significantly assist management not only with how they respond to the crisis but also how they recover from it with resiliency and strength.