The impact of COVID-19 on Australian businesses and the effect on Financial Reports

The impact of COVID-19 on Australian businesses and the effect on Financial Reports

The Coronavirus has now spread globally and is having a major impact on both the global economy and the Australian economy. Unfortunately, no one knows how long the Coronavirus threat will continue before a safe treatment is found.

In Australia, some of our major economic pillars are receiving a major blow. The education, travel, aged care and retail sectors are amongst the most impacted by the Coronavirus. Given the knock-on effect, every business has been directly or indirectly affected and therefore no one can ignore how much of an impact the Coronavirus will have on their business. With the major aspects of the supply and demand chains disrupted, most companies are working out what steps they can take to protect their businesses.

The Reserve Bank of Australia (RBA) has also reacted to the Coronavirus with its latest media release on 3 March 2020 announcing that it had lowered the cash rate by 25 basis points to 0.5 per cent. The RBA took this decision to provide additional support to employment and economic activity especially following the recent bushfires that affected our local market.

Impact on Businesses

We have all recently seen the impact on retail with a number of restaurants gone into liquidation as they struggle to keep up with high overhead costs such as rent and labour. This in turn affect landlords and household income.

Another example is the education industry where Universities which are highly dependent on overseas students have been significantly impacted financially. Due to the recent travel bans, international students have delayed their return. Universities are currently reviewing their financial budgets as a consequence of lower revenue which has an impact on existing projects and capital works such as upgrades and development of infrastructure.

China is a major trading partner for Australia. Since the Coronavirus outbreak, factories in China have temporarily closed which means a significant disruption in the supply chain for our local businesses once their existing stocks have been sold. Small and medium size businesses who rely heavily on products from China are finding themselves spending more time managing working capital rather than developing their business.

Other larger retail stores, such as Myer, have been aggressive in promoting online shopping as it is anticipated that there will be a significant drop in foot traffic.

It is critical for business owners and management to not only assess the impact of the Coronavirus but to also have a plan in place to assist them in navigating through this challenging economic environment.

Impact on Financial Report

The impact of the Coronavirus on business operations no doubt affects the balances and disclosures in the financial statements.

The measurement of assets and liabilities reported on the Balance Sheet will definitely need to be reviewed. As a result of customers facing cash flow issues, the recent adoption of new accounting standards such as AASB 9 Financial Instruments will play a major role in determining the carrying amounts of certain assets as management look to assess whether there are any impairment write-downs with respect to the expected credit loss model under AASB 9.

On the other hand, companies supplying goods to affected businesses will also need to review the net realisable value of their inventories. This can largely be seen in companies distributing food produce to affected restaurants or other similar type retail businesses.

With the RBA’s decision to lower the cash rate, there is an impact on a company’s cost of capital and in particular the determination of its weight average cost of capital (WACC). WACC is often used in the determination of asset values on the balance sheet and companies will have to assess whether there are significant changes as a result of a lower interest rate. Companies will also need to review their key assumptions in their financial forecasts if lower revenues are projected.

Management and those responsible for the preparation of financial statements should consider the need to include relevant disclosures such as operational performance, impact on asset values, subsequent events or even information that may impact the going concern of the company to ensure that the financial report gives a ‘true and fair’ view.

Recommendation

There are a number of ways to mitigate the impact of the Coronavirus. Here are some of our recommendations:

·      Talk to your accountant or financial planner to discuss your financial situation and if there are any cash flow issues;

·      Update your cash flow forecast and review your financing options to fund working capital;

·      If you are experiencing major working capital issues, update your solvency test frequently;

·      Make sure to engage with customers and suppliers early in the process. Additionally, look for substitute suppliers without risking current relationships;

·      Review your insurance policy to understand whether your business interruption insurance policy will help to recover any lost profits or revenue;

·      Consider Safe Harbour rather than liquidation or voluntary administration.

The risks associated with the Coronavirus is well and truly significant. We are passionate about your business and we can assist you in a number of ways to ensure that your business is resilient. Please do not hesitate to contact one of your Walker Wayland NSW advisors for any assistance.