Regulators mandating too many disclosures from firms on Covid impact

The impact of Covid-19 on corporates is already being felt. In the US, car rental company Hertz has applied for bankruptcy while Delta Airlines still remains a going concern thanks to a liberal financial package given under the US Cares Act. In India, most large corporates are putting up a brave front and appear to be hinting that they will get over this. However, it is the medium- and small-scale companies that would need to be watched — some mid-size hotels have already announced closure while others are waiting for the promised bank loans to be disbursed.

Advisories

In the midst of all this, the regulators seem to be going overboard in mandating disclosures on the impact of Covid. The Institute of Chartered Accountants of India (ICAI) has been issuing a series of advisories on how to report the impact of Covid-19 on inventory, events after the balance sheet date, impairment, and testing the concept of going concern.

Not to be left out, the Securities and Exchange Board of India (SEBI) issued a Circular on May 20 asking listed entities to provide details on the impact of Covid-19. These include the impact of the pandemic on the business, ability to maintain operations including the factories/units/office spaces functioning and closed down, schedule (if any) for restarting the operations, steps taken to ensure smooth functioning of operations and estimation of the future impact of Covid on its operations.

In additions, companies are to provide details of the impact on the company’s capital and financial resources, profitability, liquidity position, ability to service debt and other financing arrangements, assets, internal financial reporting and control, supply chain and demand for its products/services.

Existing contracts/agreements where non-fulfilment of the obligations by any party will have significant impact on the company’s business would also need to be mentioned. SEBI is asking for too much information too early from companies who are yet to come back to life fully.

Disclosures

Till date, corporates have been very non-committal in their disclosures on Covid. They normally say things like: “The outbreak of coronavirus pandemic globally and in India is causing significant disturbance and slowdown of economic activity. The company has considered various information as available up to the date of approval of these financial statements in assessing the possible effects of Covid-19 on its financial condition, liquidity, operations, suppliers, industry and workforce. The company, based on current estimates, expects that it will be able to meet its obligations for the next one year and the carrying amount of the assets will be recovered. The extent to which Covid-19 impacts the operations of the company will depend on future developments which remain uncertain.”

Even after the SEBI circular, they would continue to remain non-committal as it would be impossible for any corporate to put down numbers on the impact of Covid-19 on different areas of their business. The Covid-19 impact would be in two phases — immediate and the future.

The immediate impact would be felt on everyone in varying degrees. Just like the virus, the future impact would depend on how immune the company is to the crisis. Companies that have a strong immune system (balance sheet strength, reliable promoters and a good product) would continue. Those with a not-so-strong immune system would survive for a few years while those with a poor immune system would close down sooner rather than later. Now is too early to test one’s immunity.

Apart from the financial impact, Covid would also have a big impact on the economy. In the absence of reliable data, SEBI would do well to mandate companies to disclose details of the number of employees let off, reduction in pay taken, new recruits and man-days worked. This data could be aggregated to get an idea as to how hard the future is going to be for the company in particular and the economy in general.

The writer is a chartered accountant