MUMBAI: “Exceptional items” attributed to Covid-19 crisis are increasingly becoming a sore point between companies and their statutory auditors, as a large number of companies have started using Covid-related adjustments to mask dismal business results delivered in the pandemic period.
While preparing financial results, some companies are reporting certain items like loss of revenue and increased costs in a special category — exceptional items — so that the profit figure looks better. Going forward, a large number of companies and banks are set to see a new matrix in their financial statements — “EBITDAC”, or earnings before interest, tax depreciation, amortisation and Covid, say audit professionals.
Many companies and banks are in discussions with their auditors regarding categorisation of operational items like revenue and losses as exceptional items.
“An area of debate between companies and auditors is around reporting certain items as exceptional. While losses such as impairment caused due to the current environment may classify as exceptional, there is an ongoing debate on whether any component of recurring operating costs can also be classified as exceptional,” said Jamil Khatri, a partner at BSR & Co.
Companies say that since these adjustments are Covid-related and would not occur under ‘normal’ circumstances — and some of these losses may be material in nature — they should be treated differently.
However, auditors maintain that under Indian Accounting Standards (IndAS), these adjustments should be in the income statement or in notes.
Adding to the confusion is the fact that neither IndAS nor Schedule III to the Companies Act, 2013 defines the term “exceptional item”.
Recently, in an advisory, the Securities and Exchange Board of India had asked listed companies to disclose the expected impact of the lockdown on account of Covid-19 on their revenue and profit, in line with international practices.
Many companies are also looking to deduct costs they incurred due to Covid and the lockdown.
So, the cost of employees companies couldn't sack due to government regulations, contracts cancelled due to ‘force majeure’, impairment costs and additional provisioning due to the pandemic would be added back to EBITDAC.
"As the Covid-19 pandemic has severely impacted profits, some companies may look to specify and disclose profits that would have been reported had it not been for the Covid-19 crisis. This may result in some form of proforma reporting for the June-quarter results,” said Khatri of BSR & Co.
“Many companies are doing an analysis to reflect the adverse impacts of the pandemic on their operations as ‘exceptional items’ in the financial statements. This involves judgement and whereas certain direct charges such as an impairment of assets may be regarded as such, others would need to be carefully analysed based on the nature of such items,” said Sudhir Soni, the national leader (assurance) at SR Batliboi.
Between them, BSR and SR Batliboi — part of KPMG and EY groups — are auditors to more than 300 of the biggest Indian and multinational companies that operate in the country.
Many companies and banks in their annual results have already shown the impact of the pandemic.on their operations as ‘exceptional items’ in the financial statements. This involves judgement and whereas certain direct charges such as an impairment of assets may be regarded as such, others would need to be carefully analysed based on the nature of such items,” said Sudhir Soni, the national leader (assurance) at SR Batliboi.
Between them, BSR and SR Batliboi — part of KPMG and EY groups — are auditors to more than 300 of the biggest Indian and multinational companies that operate in the country.
Many companies and banks in their annual results have already shown the impact of the pandemic.
An ET analysis, published on May 23, showed that out of the 153 listed entities that announced their annual results, 43 had made adjustments to their books that were directly attributable to the Covid-19 crisis.
The pandemic has led to a marked change in the way certain industries might earn revenue. For example, hospitality companies are getting more money from quarantine business than the normal operations which remain shut due to government restrictions. So now the industry is staring at a new challenge in terms of both the timing and amount of revenue recognition.
Many auditors are also challenging the quantum of write-offs companies can take due to the Covid-19 pandemic.
There are no models or projections available for auditors to fall back on as a disruption like this one caused by the coronavirus has never been witnessed, say auditors.
Many audit professionals are hoping that practices and guidance will evolve in this area as none are available currently.
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