Accounting Implications Of Coronavirus (COVID-19)
April 13, 2020
As the Coronavirus pandemic has matured, so have the complexities and implications on businesses compounded. There has been a tightening of financial conditions, a collapse of inflation expectations, drastically reduced oil prices and the lowest ever bond yields. Furthermore, the reduced Gross Domestic Product (GDP) growth forecast and the severe impact on public health, supply, and demand, manufacturing and services, funding and liquidity, have created demand shocks, supply dislocations, financial risk, health care gaps, wealth reduction and many more such complications.
This coupled with quarantines, travel restrictions and social distancing has led to a significant drop in spending, as also a state of recession. The resulting loss of business revenue could trigger laying off employees and lead to a sharp increase in unemployment levels. Corporate bankruptcies could soar, putting significant pressure on the banking and financial system, thereby developing a lower risk appetite.
While such a slowdown would impact Small and Medium Enterprises (SMEs) more severely, not all sectors are equally affected. Service sectors, including Aviation, Travel, Tourism, Hospitality, and Retail are likely to witness the largest impact.
Given that is it unclear as to where this will lead to in the future, organizations should not underestimate the potential economic and market impact ahead. This is an evolving situation and brings with it, several implications, which is why this is the time companies should be assessing their business operations, funding, hedging and risk management strategies, and adopt mechanisms to prepare themselves to get back on track at the earliest and put in place, robust precautionary measure for the times ahead.
In lieu of the above facts, these are the 8 areas that businesses should be assessing:
- It is recommended that companies undertake a scenario analysis to assess how long existing sources of liquidity would be
able to hold up, in an elongated stressed environment impacted by supply chain pressure, customer demands,
cash flow instability and lack of funding, to name a few. - The liquidity position would have to be reviewed as well, to determine if there are hidden pockets,
including the availability of undrawn bank lines. Such reserves can be optimized for usage in other
regions and countries, and the potential for setting up additional banking facilities to support
overall business should also be evaluated. - A contingency plan can also be developed, for the funding of upcoming large pending transactions in the near months.
Companies will have to be prepared to make quick decisions during the intermittent stable period, to opportunistically
raise debt capital at historically low rates. - Reviewing existing capital allocation plans like Capital Expenditure (CAPEX), Share Repurchases, debt pay down, etc.,
would also be beneficial, in this new environment of higher economic uncertainty.
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