Improvement of Accounting of Certain Assets and Provisions in the

Conditions of the Global Covid-19 Pandemic Impact: Example of

Ukraine

VALERII ZHUK

Department of Accounting and Taxation,

National Scientific Centre “Institute of Agrarian Economics”, UKRAINE

STANISLAV VASYLISHYN

Department of Accounting, Audit and Taxation, State Biotechnological University, UKRAINE

OLEG KANTSUROV

Audit Public Oversight Body of Ukraine, UKRAINE

OKSANA PROKOPYSHYN

Department of Accounting and Taxation, Lviv National Agrarian University, UKRAINE

YEVHEN STUPNYTSKYI

Service of the Deputy Director for Accounting, Reporting and Payments, DTEK Service LLS,

UKRAINE

Abstract: - The global pandemic due to the spread of coronavirus COVID-19 has caused an economic crisis

that mankind has not known since the Great Depression of the 1930s. The post-pandemic crisis has affected all

areas of socio-economic life in all countries of the world. Under these conditions, it is especially important to

study such transformational effects, the source of which should primarily be the data of accounting and

financial reporting of business entities. The article is devoted to the study of the transformational impacts of the

global COVID-19 pandemic on accounting of certain types of assets and provisions and the development of the

directions of its improvement in the conditions of such impacts, focusing on the example of Ukrainian business.

The article focuses on the role of the accounting and business disclosure in reporting on the conditions of the

global COVID-19 pandemic; the objects of the accounting sensitive to the influence of COVID-19 have been

carried out. Possible directions for improving the accounting of inventories, accounts receivable, financial

investments (debt instruments), and provisions for future payoffs and payments due to the effects of the global

COVID-19 pandemic have been given. The prospects for further research are to improve the proposals and

practical recommendations presented in the research, as well as the development and practical testing on their

basis of accounting and analytical models for assessing possible future risks of the COVID-19 pandemic for

management purposes and to disclose risk assessment in financial reporting.

Key-Words: - Accounting, COVID-19, Pandemic, Financial Reporting, Assets, Provisions, Risks, Economic

Crisis, Lockdown

Received: September 14, 2021. Revised: July 5, 2022. Accepted: July 25, 2022. Published: September 5, 2022.

1 Introduction

1.1 The Impact of the Global COVID-19

Pandemic on the Economy and Business

The modern world is in the process of constant

global change caused by economic, social, and

climate crises. In March 2020, the World Health

Organization (WHO) recognized COVID-19 as a

pandemic. The COVID-19 pandemic has shocked

and brought serious new challenges. This applies

not only to the health status of the population but

also to the economic, social, and political aspects of

people's lives (Djajadikerta et al., 2021). As the UN

Secretary General Antonio Guterres aptly put it, «in

2020, conflict, climate change, and COVID-19 have

created the greatest humanitarian challenge since the

Second World War. Together we must continue to

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Valerii Zhuk, Stanislav Vasylishyn,

Oleg Kantsurov, Oksana Prokopyshyn,

Yevhen Stupnytskyi

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support those at greatest risk in these unprecedented

times» (UN, 2020).

The leading world scientists and experts

unanimously emphasize the undeniable impact of

the global COVID-19 pandemic on the activities of

business structures in all sectors of the economy of

all countries without exception.

Firstly, in the short run, the outbreak of COVID-

19 leads to a decline in labor forces and firm

outputs. In the long run, the high infectivity of

COVID-19 can change the economic steady-state

(long-run equilibrium) through the reduction of

healthy human capital and labor participation rate

(Deng et al., 2021). Secondly, firms have the

incentive to follow stakeholder-value-oriented

governance, which would benefit the preservation of

their value as well as contribute to societal well-

being, especially at times of pandemic outbreaks or

other crises of a similar scale in the future (Bose et

al., 2021). Thirdly, Covid-19 has affected all factors

of aggregate demand (i.e., consumption, capital

spending, and exports) in exceptional decline

(Hassan et al., 2021). Finally, the pandemic forces

us to analyze how our actions and decisions today

can impact future decisions or create long-term

costs (Hörisch, 2020).

According to the World Bank, the global

COVID-2019 pandemic caused a global recession,

in particular, real GDP in the world in 2020 fell by

3.5% compared to 2019 (World Bank, 2021).

According to the experts, GDP growth in 2021 is

expected at 5.6% only if the pandemic is contained

and the economic crisis is resolved.

In particular, the level of GDP decline in 2020

was 3.5% in the USA, 6.6% in the EU, 4.1% in

Brazil, and 7.3% in India (fig. 1).

Fig. 1: Rate of change real GDP in the world and some countries, 2018-2022

Source: calculated according to the data (World Bank, 2021)

The exception was China, which, despite the

pandemic, kept real GDP growth at 2.3. The

extremely negative impact of the pandemic is

particularly evident in the tourism industry,

manufacturing industry, and the sphere of services

and transport. According to the experts, in some

areas of the economy, only 1/3 of the available

workplaces will remain stable after global

lockdowns, and part of the workforce will work

remotely.

Ukraine is trying to take measures to support

domestic small businesses and, health care, change

approaches to key areas of life, increasing funding

for critical infrastructure (Kuznetsov et al., 2019,

2020). However, due to the rapid increase in the

number of patients with COVID-19, and the launch

of the vaccination process, which requires additional

costs, Ukraine does not have significant economic

resources to overcome the consequences of the

pandemic crisis (Ulyanchenko & Vasylishyn, 2021).

Therefore, the further impacts of the global

COVID-19 pandemic will inevitably exacerbate the

current economic crisis and affect all aspects of the

economic life of Ukrainian businesses.

2 Problem Formulation

2.1 The Role of Accounting and Business

Disclosure in Reporting on the Conditions of

the Global COVID-19 Pandemic

3,2 3,0 1,9

6,8

1,8

6,5

2,5 2,2 1,3

6,0

1,4

4,0

-3,5 -3,5

-6,6

2,3

-4,1

-7,3

5,6 6,8

4,2

8,5

4,5

8,3

4,3 4,2 4,4 5,4

2,5

7,5

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

World

USA

China

Brazil

India

2018 2019 2020 2021 (forecast) 2022 (forecast)

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COVID-19 pandemic has forced business

organizations, nations, and governments to rethink

the predictive analysis of the occurrence of such

hazards and their social, economic, and financial

implications the world over (Bhattacharya et al.,

2021). The initial concerns among key stakeholders

confirm their preoccupation with the impact of

COVID-19 on economic growth. Reports highlight

that the social and economic impacts of COVID-19

are unprecedented, and continue to unveil

themselves (Filho et al., 2020).

According to K. Bhaskar, J. Flower and R.

Sellers, financial and corporate reporting have never

been so fraught with difficulties as companies fail to

give guidance about the future in an increasingly

uncertain world aided and abetted by the COVID-19

pandemic (Bhaskar et al., 2021). The preparation of

the annual financial statements is subject to a series

of accounting principles aimed at ensuring proper

reporting to provide stakeholders with a clear

representation of the companies’ economic and

financial situation (Tibiletti et al., 2021). In 2021,

most European and Ukrainian companies stated in

their financial reporting that the spread of

coronavirus had a significant negative impact both

at the macro level due to declining economic

activity in the world, including falling capital

markets and sharp declines in commodity prices,

and at the company level (Pylypenko et al., 2019).

This has certainly increased the level of uncertainty

in forecasting future cash flows, primarily in energy,

retail trade, entertainment, transport, and other

industries due to quarantine and/or the spread of the

virus (Babenko et al., 2019, 2020).

The governments of the countries have launched

a series of restrictive measures to prevent the spread

of the virus, including quarantine during periods of

virus spread. The economic environment has

changed dramatically, which has inevitably led to a

revision of key management judgments, approaches

to risk assessment that cannot be ignored when

calculating the number of expected credit losses, the

creation/revision of provisions value for future

payoffs, and payments. Management should assess

whether it is appropriate to use approaches and key

assumptions to form accounting estimates and

whether the data on which the calculations are based

are representative. This situation requires

appropriate changes in the systems of internal

control, analytical provision of the process of

preparation, approval, and audit of financial

reporting. As a result, accounting also requires

appropriate changes and development as a basis for

the analytical provision of the processes at the levels

of management accounting, preparation of financial

reporting, and at the levels of budgeting, strategic

planning, and economic security.

The role of financial and non-financial

information generated by the accounting system in a

pandemic is extremely important. The analysis

revealed the relevance not only of short-term

financial information but also of medium scenario

analyses. The forecasting analysis became a pivotal

instrument to use. The intensity of financial analyses

increased due to the need to map and understand the

crisis’s economic effects with additional analyses

that would not have been carried out in a no

pandemic situation (Passetti et al., 2021). The role

of accounting and information provision is

especially growing during the crisis, as accounting

information and its analysis of the state of affairs in

the branches allows to predict the most realistic

scenario (Pravdyuk, 2020). Moreover, according to

the leading scientists, the subject of accounting is

the nature of accounting and information provision

of trust and control in the socio-economic (soon

digital) space (Zhuk et.al., 2020; Vovk et al., 2020),

which was once again proven in the global

pandemic. While the pandemic has imposed

changes on researchers’ work-life, it has also

unlocked new opportunities for research into its

effects on accounting and research (Molinari & De

Villiers, 2021).

The accounting information is even more

important in times of great uncertainty and auditing

takes on greater importance in providing trust to

capital markets (Humphreys & Trotman, 2021). The

quality of accounting information and related

disclosures in the financial statements is more

important for capital markets, and investors in the

Covid-19 pandemic period (Cui et al., 2021).

The accounting can be useful to compare and

trade-off interventions to income statements balance

sheet variables. Accounting could, moreover, be

suggestive of alternatives around asset purchases or

leases, make or buy, various taxation effects, and

off-balance sheet interventions such as guarantees.

Accounting will also be needed to define the time

horizon over which the COVID-19 -debt will be

repaid (Ahrens & Ferry, 2021). Scientists Leonardo

Rinaldi, Charles H. Cho, Sumit K. Lodhia,

Giovanna Michelon & Carol A. Tilt believe the

pandemic effects on modern society will be deep

and permanent, and thus they call for in-depth,

reflexive interdisciplinary contributions in all areas

of accounting, business, finance and related subjects

that address the responses to the COVID-19 crisis

with a global perspective (Rinaldi et al., 2020).

That is why the impact of the effects of COVID-

19 in the context of the transformation of accounting

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and reflection of business in financial reporting is

undoubtedly a relevant area of research.

The purpose of the research is to establish the

transformational effects of the global pandemic

COVID-19 on the reflection in the accounting of

certain types of assets and provisions, as well as to

develop the ways to improve it on the example of

Ukrainian business.

2.2 Methodology, Data and Hypotheses

The accounting forum aims to promote a thorough

understanding of every aspect of the pandemic,

including the economic, social, environmental,

ethical, and governance impacts (Rinaldi et al.,

2020). Moreover, consideration of the potential

consequences of the global pandemic should be

cautious, given the massive uncertainties involved

(Heald & Hodges, 2020).

Qualitative accounting research also relies on

secondary data sources, i.e. data that are generally

available. Examples of secondary sources are annual

reports, formal press releases, website

communications, and all other publicly available

documents (Molinari & De Villiers, 2021). With

changes in external factors combined with strategic

and operational shifts within the organization,

budget and forecast information are being

significantly revised (Humphreys & Trotman,

2021).

The methodology of the research involves the

use of a systematic approach (establishing the role

and directions of transformation of accounting and

business disclosure in reporting in the context of the

global pandemic COVID-19); analysis and synthesis

(substantiation of the main objects of accounting

sensitive to the impact of COVID-19 and analysis of

the results of their impact); sampling method

(determining the number of the investigated

enterprises and assessing the quality of the

population); monographic method (determining the

consequences of the COVID-19 pandemic);

graphical method (display of individual indicators)

and calculation and constructive method

(calculations of the variability of valuation

indicators of individual assets and provisions).

The research methodology is based on the

analysis of financial reporting of 72 Ukrainian

companies for 2019 and 2020 (fig. 2). While

researching the financial reporting, we dealt with the

qualitative characteristics, which were to determine

the required size of the sample totality for the

representativeness of the sample. Since the

calculations have been performed based on

alternative characteristics and their share in the

general population is not known, we accept it at the

level of 0.5 because at this value of the fraction the

variance reaches the maximum value. The

advantage of this method is that it allows for

determining the size of the sample if there is no data

from the previous research and not conducting it.

That is, the studied sample is representative, which

gives grounds to make certain objective conclusions

and use the results for further research.

At the same time, we used the financial reporting

of the enterprises with their division by the

classification of the Law of Ukraine “On

Accounting and Financial Reporting in Ukraine”

(The Verkhovna Rada of Ukraine, 1999):

- large enterprises (meet at least two of the

following criteria: book value of assets - more than

20 million euros; net income from sales of products

(goods, work, services) - more than 40 million

euros; the average number of employees - more than

250 people);

- medium-sized enterprises (meet at least two of

the following criteria: book value of assets - up to

20 million euros; net income from sales of products

(goods, work, services) - up to 40 million euros; the

average number of employees - up to 250 people);

- small enterprises (meet at least two of the

following criteria: book value of assets - up to 4

million euros; net income from sales of products

(goods, work, services) - up to 8 million euros; the

average number of employees - up to 50 people);

micro-enterprises (meet at least two of the

following criteria: book value of assets - up to 350

thousand euros; net income from sales of products

(goods, work, services) - up to 700 thousand euros;

the average number of employees - up to 10 people).

The research on the companies’ financial

reporting has shown that companies of almost all

sizes, namely small, medium, large, and of public

interest, in their financial reporting note that the

COVID-19 pandemic had an impact on companies'

activity and financial indices (tab. 1).

The main hypothesis of the presented research is

the statement that overcoming the consequences of

the economic crisis caused the global COVID-19

pandemic COVID-19 and improving the risk

management of Ukrainian businesses directly

depends on accounting and analytical provision,

which necessitates improving accounting policies

for individual objects, sensitive to the impact of the

COVID-19 crisis and will ultimately facilitate

reliable business disclosure in reporting.

We draw attention to certain limitations of our

research, which may affect its results and

conclusions.

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Fig. 2: Respondent enterprises, reporting of which has been analyzed during the research

Source: financial reporting of 72 Ukrainian enterprises

Table 1. Disclosure of information in financial reporting regarding the impact of COVID-19

Financial reporting section

Composition of information provided

Operating environment. Conditions in

which the company operates

Almost all companies noted that starting from the first quarter of

2020, Ukraine’s economy is shrinking due to declining

production of goods, work, services, and the introduction of

government measures to prevent the spread of the coronavirus

pandemic.

Basis of preparation of financial reporting:

assumptions about business continuity

Several companies stated that the pandemic was taken into

account in the analysis and that due to the COVID-19 outbreak

there was no significant uncertainty about activity continuity

used for the financial reporting or that the uncertainty associated

with COVID-19 is not a key risk factor that could materially

affect future cash-flow prognosis.

Significant accounting estimates and

judgments in applying accounting policies

Several companies noted that changes in accounting estimates

and assumptions preceded by changes in the macro-

environment, including but not limited to the effects of the

pandemic, have been revealed:

- signs of economic depreciation of non-current assets;

- a significant increase in credit risk on financial assets.

As a result of the tests, the depreciation of fixed assets has been

recognized. Expected loan loss rates have been revised upwards.

Risk assessment and management

Several respondents indicated that the final impact of COVID-

19 would depend on future developments, including, among

other things, the impact of the government, and other measures

to prevent the spread of the virus, develop effective treatments

and vaccinations, the duration of the pandemic, and/or

quarantine restrictions, and also relevant actions of customers,

suppliers, other third parties, the general recovery of economic

conditions. In the financial reporting of some companies, the

leaders have stated that it continues to monitor developments

and efforts to identify, manage and mitigate the consequences of

the COVID-19 pandemic on the companies’ activity results.

Contingent and contractual obligations

There is no detailed information on the impact assessment of

COVID-19

Events after reporting date

In the financial reporting for 2019, most of the sampled

companies indicated that the outbreak of the pandemic was

considered a non-corrective event after the reporting date.

Disclosure of information in notes to

There is no information on the numerical assessment of the

large

enterprises

32;

44%

medium-sized

enterprises

10;

14%

small

enterprises

10;

14%

micro-

enterprises

32;

28%

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certain articles of main forms of reporting

(decoding of numerical indicators)

impact of COVID-19

Source: developed by the authors

Limitations of the researched enterprises

These researches have been conducted mainly to

involve large and medium-sized enterprises (72% of

respondents), which report under IFRS and do not

use IFRS for small and medium-sized enterprises

(Gontareva et al., 2020). This, in turn, results in a

greater number and volume of business transactions,

management personnel of a certain qualification,

and, as a consequence, the need for analytics for

management purposes, as well as for the formation

of appropriate disclosures in the financial reporting

(Perevozova et al., 2019). Considering this, the

results and recommendations obtained may not be

fully utilized by small enterprises, as well as the

enterprises that apply IFRS for small and medium-

sized enterprises, or should be applied to these

entities only if they are relevant and material.

2. Limitations on the information base

The impact of the COVID-19 pandemic at both

macro and certain enterprises’ levels during the

research period has not yet been fully identified

and/or documented. We conducted the research on

the data of the respondent companies only for 2019

and 2020, respectively.

By the end of 2020, several vaccines had been

successfully developed, and some countries had

begun vaccination. However, the situation with

coronavirus remains largely volatile and therefore

its further impact is difficult to predict and quantify.

The governments of the countries and the leaders

of the companies continue to analyze the potential

impact, implement restrictive measures, and take

other actions to mitigate the possible negative

effects of COVID-19. We continue our research and

assume that in the presence of information for more

periods, especially after the completion of

vaccination and evaluation of the effectiveness over

time of other restrictive measures, the conclusions

and recommendations can be expanded or adjusted.

3 Results and Discussion

3.1 Identification of Accounting Objects

Sensitive to COVID-19 Impact

A detailed analysis of the financial reporting,

management reports and management accounting

data has made it possible to determine which

accounting objects are most sensitive to the impacts

of macro- and micro-environmental changes caused

by COVID-19 (tab. 2).

Table 2. Accounting entities that are most sensitive to COVID-19 impact

Accounting entities

Factors and results of impact

Fixed assets

Signs of economic depreciation of fixed assets due to significant changes in supply, reduction

of business and economic activity, and shrinking markets/sales segments.

As a result of the revision of sales forecasts for the medium and terminal periods, there were

facts when the present number of net cash flows were higher than the net book value of fixed

assets. Therefore, impairment losses were recognized in the financial reporting.

Inventories values,

including goods /

finished products for

sale

As a result of declining market demand, and reducing production volumes, there is a decrease

in the turnover of inventories, as well as their deterioration. The decrease in demand also led

to a decrease in market prices, as a result of which the value of balances in the warehouses of

the companies was higher than the market ones. All this indicated that the value of inventories

is higher than the net selling price, and therefore the corresponding depreciation had to be

recognized.

Accounts receivable,

Financial investments

(debt instruments)

carried at amortized

cost

Deteriorating economic conditions in the market, the introduction of specific government

measures (for example, the right of consumers to defer payment of utilities without the right

of suppliers to apply penalties) inevitably led to deterioration in payments and reduced

turnover of receivables.

Ensuring future

payoffs and payments

The general negative trends in the impact of COVID-19 caused several events, as a result of

which individual contracts showed signs of aggravating. As a result of the increase in the level

of credit risk, there is a need for an additional assessment of the fair value of the guarantees

provided by IFRS 9. Also, some companies became parties to legal claims as a defendant as a

result of non-compliance with the terms of contracts, which was caused, inter alia, by the

impact of quarantine restrictions and the introduction of lockdown.

Source: developed by the authors

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Thus, given the significant and sometimes

comprehensive impact of COVID-19 on the

financial reporting of economic entities,

identification and accounting of related costs are

becoming increasingly important. Accumulation and

systematization of information are appropriate at the

level of management accounting for further risk

assessment, budgeting, factor analysis of costs, as

well as for the formation of the disclosure of certain

elements in the financial reporting. In turn, the

calculation of the value of individual items of

financial reporting for their true disclosure may

require changes or modifications for individual

entities based on the principles of materiality.

3.2 Improvement of Inventory Accounting

By IAS 2 “Inventories”, inventories, including

goods/finished products for sale at the date of

financial reporting are valued at the lower of the

following two values: cost and net realizable value

(IFRS Foundation, 2021). Inventories are usually

written off to net realizable value on an individual

basis (based on the accounting of batches of

individual nomenclatures of goods). If appropriate,

inventories can be combined into separate groups

for this purpose. Preliminary estimates of net

realizable value are based on the most reliable facts

that existed at the time of preliminary estimates of

the expected number of inventories sold. These

preliminary estimates take into account price or cost

fluctuations directly related to events that occur

after the end of the period, to the extent that such

events confirm the conditions that existed at the end

of the period.

In practice, the most common methods of

determining the net realizable value are the analysis

of the market value of this nomenclature

(commodity position) of inventories within the

individual approach to significant balances, as well

as the depreciation of inventories based on the

analysis of their turnover by group approach for

insignificant positions or in the case when it is

impossible or impractical to use an individual

approach (tab. 3).

The amount of any partial write-off (depreciation)

of inventories to their net realizable value and all

inventory losses should be recognized as an expense

in the period in which such depreciation occurs.

Table 3. Basic approaches to inventory assessment

Approach to assessment

Description

Individual approach to

determining the value

Determining the net sales price of a

particular nomenclature/batch

For significant balances of inventories

for which there are market/contract

prices.

For completely depreciated positions.

Estimation of cost

depending on the turnover

of stocks or standard terms

of storage.

Decrease in value (depreciation) of both a

particular batch and groups of inventories in

case of a decrease in turnover or significant

shelf life

For multi-item stocks, the determination

of individual values of which is

impossible or impractical

Source: systematized using IAS 2 (IFRS Foundation, 2021)

The amount of any cancellation of any partial

write-off of inventories arising from an increase in

net sale value shall be recognized as a decrease in

the amount of inventories recognized as an expense

in the period in which the cancellation occurs.

Judgments may be needed to determine the

influence of COVID-19 on the depreciation of

inventories, but the following approach may be

suggested for analysis. For example, the company

manufactures products whose main raw material is

material "A", as well as materials of nomenclature

groups "B" and "C". To provide the production plan

and order, about 10000 units of material "A" were

purchased for 120 USD for one, which was part of

inventories in the balance sheet as of 31.12.2019.

However, as a result of the introduction of

quarantine restrictions in March before the date of

approval of the reporting before the issue, the

market price fell to 100 USD due to declining

demand and tends to decrease. The fall in the price

of materials indicates that the cost price of finished

products will be higher than the net realizable value.

During the normal operating cycle, the materials of

Groups "B" and "C" were not stored in warehouses

for more than 40 days. For nomenclature Groups

"B" and "C" the Company uses the method of

accrual of depreciation by the terms of storage:

(storage more than 20-40 days - the amount of

depreciation 10% of value, from 41 - 60 days - 20%

of value, 61 - 90 days - 30 % of value, etc.). Also in

the process of inventory taking the inventories were

found that had been damaged due to improper

storage for 10,000 USD (tab. 4).

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Table 4. Distribution of losses due to depreciation of inventories by impact factors, thsd. UAH

Material

Initial value

Depreciation of

inventories

recognized

earlier

Net price

sales

Additional

depreciation

Impact of

COVID-

Other

influencing

factors

А («Raw materials»)

1 200 000

1 000 000

200 000

Group "B" («Other

materials») including

shelf life up to 20 days

550 000

shelf life up to 40 days -10%

450 000

405 000

- 45 000

45 000

shelf life up to 60 days -20%

150 000

- 15 000

120 000

- 15 000

15 000

Group "С"

«Goods» including

shelf life up to 20 days

250 000

shelf life up to 40 days -10%

200 000

180 000

- 20 000

20 000

shelf life up to 60 days -20%

150 000

-15 000

120 000

- 15 000

15 000

spoiled inventories with a

shelf life of up to 60 days

10 000

-1 000

- 9 000

9 000

In general:

2 960 000

-31 000

2 625 000

304 000

230 000

74 000

Source calculated by the authors

In our opinion, to ensure the accumulation of

information on the impact of COVID-19 on the

depreciation of inventories, it is advisable to open

appropriate sub-accounts in the company's chart of

accounts in terms of appropriate relevant groups of

materials for analysis and formation of appropriate

disclosures, for example:

"Accrual / Reversal of depreciation of inventories

(Raw materials) - the impact of COVID-19";

"Accrual / Reversal of depreciation of inventories

(Other materials) - the impact of COVID-19";

"Accrual / Reversal of depreciation of inventories

(Goods) - the impact of COVID-19";

"Accrual / Reversal of depreciation of inventories

(Raw materials) - Other factors";

"Accrual / Reversal of depreciation of inventories

(Other materials) - Other factors";

"Accrual / Reversal of depreciation of inventories

(Goods) - Other factors".

3.3 Improvement of Accounting of

Receivables and Financial Investments (Debt

Instruments), which are Accounted for at an

Amortized Value

In the current COVID-19 pandemic, the problem of

non-payment in Ukraine, and their uncontrolled

growth as trade debt is becoming common.

Settlements with debtors and creditors at domestic

enterprises are not entirely favorable, as there are

significant amounts of debt and long maturities

(Haiduchok et al., 2020). According to the research,

the management of the companies inevitably faces

the problem of reviewing the assessment of

expected credit losses (ECL). After all, the general

deterioration of the economic situation leads to a

deterioration in the turnover of working capital of

the companies and, as a consequence, there is a

tendency to increase receivables. In some cases,

there is a default on payments or bankruptcy of the

debtor.

The key assumptions and accounting estimates to be

revised as a result of the pandemic impact are given

in tab. 5.

For example, a company uses a payment history

for certain groups of financial assets to determine

which percentage of receivables with a certain

period of delay is not repaid (the receivables are

considered bad).

Despite the practical complexity of the

calculation and the need to apply a large number of

judgments, we still consider it appropriate to

determine separately the impact of COVID-19 on

the change in the amount of expected credit losses.

It will also make it possible to determine the share

of the pandemic factor in the overall effect of the

increase in the reserve as a result of changes in key

accounting estimates and judgments. To accumulate

information and ensure analytical accounting, it is

advisable to open appropriate sub-accounts by type

of financial assets:

"Accrual / Reversal of the provisions for

expected credit losses (by type of financial assets) -

the impact of COVID-19".

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DOI: 10.37394/23207.2022.19.124

Valerii Zhuk, Stanislav Vasylishyn,

Oleg Kantsurov, Oksana Prokopyshyn,

Yevhen Stupnytskyi

E-ISSN: 2224-2899

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Volume 19, 2022

Table 5. Key assumptions and accounting estimates

Assumptions

Significant relevant changes

Grouping of financial assets (receivables with

the same class of credit risk)

Identification of new groups of financial assets (creation of new or

separation from existing ones). Transfer of counterparties from one

group to another.

Revision of credit risk rates for certain groups

of financial assets

Given the general negative conditions of the economic environment,

there is a need to use a more cautious approach when calculating rates.

For example, the introduction of additional adjustment factors which

take into account the risks of the country of presence, industry risks,

default status of the group of companies to which the debtor belongs,

and so on.

Review of individual credit risk rates for

individual counterparties

Recalculation of rates taking into account deterioration of payments.

Transition from a group approach to an individual one with assessment

a payment history of particular clients.

Identification of counterparties and groups of

counterparties for which default has occurred

or is highly probable

Additional analysis of counterparties for default. Review of the

company's accounting policy for default criteria in a more prudent

approach.

Introduction of additional metric parameters,

in the particular probability of occurrence of

several scenarios, into the methodology of

calculation of ECL rates for separate groups

of financial assets or separate significant

financial instruments.

Improving the calculation method by introducing more objective

assessments, in particular the determination of credit risk rates for

several scenarios, followed by the determination of the weighted

average rate given the probability of a particular scenario, taking into

account the time factor.

Implementation of measures to increase the

accuracy of forecasts

Involvement of independent experts to obtain external indicators.

Wider use of indices and rates of rating agencies, and external financial

/ information resources.

Source: developed by the authors

3.4 Improvement of Provisions of Future

Payoffs and Payments in Conditions of

Uncertainty due to COVID-19 Impact

One striking example of the impact of COVID-19 is

the recognition of individual contracts by or dance

with IFRS 37. This is especially true in cases where

any adverse circumstances arising from the effects

of COVID-19 or appropriate precautionary

measures had no legal basis to be considered force

majeure.

Paragraphs 10, 68 of IASB 37 define an onerous

contract as the contract under which the unavoidable

costs of meeting the contractual obligations

outweigh the economic benefits expected to flow

from the contract. Inevitable contract costs reflect

the lowest net termination costs that are less than the

two estimates: the cost of performing the contract or

any compensation or penalties for non-performance.

These requirements should be considered in

conjunction with the prohibition in IASB 37 on

securing future operating losses (IFRS Foundation,

2021). The main differences are that future

operating losses do not depend on the future actions

of the entity and do not arise from liabilities arising

from a past event. However, the difference is not

always clear and judgment may be required. For

example, a company has a contract to sell goods at a

fixed price to a buyer. Due to quarantine

restrictions, the company is not able to supply goods

on these terms due to the downtime of its supplier.

At the date of preparation of the financial reporting,

the management, for example, is considering

options for the following actions: either to pay a

pinafore of 15,500 USD for long-term withdrawal

from the contract or change a supplier.

In addition, delivery on these terms will increase

costs by exceeding the company’s margin from

resale by 15,500 USD within 14 months before the

expiration of the contract. Changing the terms of

delivery will reduce the amount of damages but will

lead to an additional fine of 1,500 USD. Thus, the

smallest amount should be the number penalties

(15,500 USD), for which provisions should be

created. However, in our view, first, in determining

the number of provisions, it is necessary to assess

the present value of unavoidable costs less the

expected benefits of the contract.

This net approach is not explicitly stated in IASB

37, but is on system with the definition of

unavoidable costs. Secondly, guided by the

precautionary principle, the probability should be

taken into account in the presence of several

scenarios of events in the presence of their reliable

assessment (tab. 6).

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DOI: 10.37394/23207.2022.19.124

Valerii Zhuk, Stanislav Vasylishyn,

Oleg Kantsurov, Oksana Prokopyshyn,

Yevhen Stupnytskyi

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Table 6. Variability of accounting estimates of provisions, thsd. UAH

num.

Scenario А

Scenario В

Discount rate

Scenario А

Scenario В

Additional losses in

accordance with the

sales budget and cost

price

Additional losses

when changing the

terms of delivery

(including the fine in

the first month)

Given cash

flows

Given cash

flows

Probability 40%

Probability 60%

1000

2300

1,00

1000

2300

1100

1110

0,99

1086

1096

1200

0,97

1169

1200

1100

0,96

1154

1058

1000

900

0,95

949

854

1300

1250

0,94

1218

1171

1400

1490

0,92

1294

1378

1200

1100

0,91

1095

1004

1200

1100

0,90

1081

991

1200

1100

0,89

1067

978

1100

900

0,88

965

790

1000

850

0,87

866

736

1000

850

0,85

855

726

800

750

0,84

675

633

15700

16000

14473

14882

Average capital for the relevant period (relatively)

17%

Min amount of costs ((14472,56*0,4) + (14881,80*0,6))

14718

Source calculated by the authors

Thus, the number of provisions created should be

14718 USD.

According to the survey of respondents, a

significant part of them noted that the impact of

COVID-19 was including an increase in lawsuits

from both suppliers and customers. The subject of

lawsuits, as a rule, was the recovery of debts due to

late payment or penalties for late delivery of goods,

work, and services.

Accordingly, companies had to create additional

legal risk provisions by estimating the number of

additional liabilities and future litigation expenses.

Estimates of results and financial impact are

determined based on the judgment of the

management of the entity and are supplemented by

the experience of such operations, and in some

cases, the conclusions of independent experts. The

generalized register of legal risks with a probability

assessment can have the following form (tab. 7).

Table 7. Proposed structure of Register of legal risks with probability assessment, thsd. UAH

Lawsuit

Amount

of the

suit

Amount of already

recognized

liabilities in the balance

sheet

Estimated

amount of

court costs

Forecast of

negative court

decision %

Provisions sum

(probability

>50%)

Impact

COVID-

10000

1000

40%

15000

12000

2500

60%

5500

25000

3000

90%

28000

Total

50 000

22 000

6 500

33 500

Source calculated by the authors

This example shows that provisions for legal

risks should be recognized in the balance sheet for

33,500 USD, and the amount of the estimated court

costs of claim №1 should be disclosed in the notes

to the financial reporting as contingent liabilities.

Also, to ensure the accumulation of information and

the necessary analytics on the impact of COVID-19

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DOI: 10.37394/23207.2022.19.124

Valerii Zhuk, Stanislav Vasylishyn,

Oleg Kantsurov, Oksana Prokopyshyn,

Yevhen Stupnytskyi

E-ISSN: 2224-2899

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Volume 19, 2022

on the formation of security for future expenses and

payments, it is proposed to open appropriate sub-

accounts in the work plan of the company's accounts

in terms of relevant provisions

“Accrual / Reversal of provisions under onerous

contracts of COVID-19 impact”;

“Accrual / Reversal of provisions under onerous

contracts of other factors”;

“Accrual / Reversal of provisions under legal risks

under COVID-19 impact”;

“Accrual / Reversal of provisions under legal risks

of other factors”.

4 Conclusion

The global pandemic caused by the spread of the

COVID-19 coronavirus has affected the economies

of all countries without exception and has posed

new challenges to the governments, businesses, and

the social sphere, and changed the way things are in

general.

Therefore, the COVID-19 pandemic has had

significant consequences that will have long-term

effects. Among them, are the economic crisis and

falling GDP, stock market crashes, disparities in

individual countries’ participation in the world

economy, cessation of a significant amount of

business, rising unemployment, increased e-

commerce, rupture of traditional logistics chains,

socio-economic transformations, and so on.

Modern Ukraine is an integral part of global

geopolitical processes and world trade. Ukraine

takes 1st place in Europe by territory, the 35th one in

terms of population in the world, and has significant

natural resources, and high economic and

intellectual potential, which will continue to grow.

Thanks to favorable natural and climatic

conditions, Ukraine can provide food for 600

million people and is now one of the largest

producers and exporters of grain in the world. This

gives grounds to assert the important role of Ukraine

in ensuring food security in the world. Ukraine’s

modern European integration vector stimulates the

development of the national economy and accelerate

by integration into the world economy.

As a result of our research, it has been found out

Ukrainian companies in various sectors of the

economy, regardless of their size and volume of

activity have been significantly affected by the

coronavirus COVID-19, as noted in their financial

reporting. As a rule, companies disclosed this fact

by describing the conditions in which the company

operates, as well as assumptions about business

continuity. Almost all respondents noted that the

fact of the coronavirus pandemic and its

consequences had a significant impact on key

accounting judgments, with companies having

significant practical difficulties in determining the

factor impact of COVID-19. The results of the

research also identified the objects of accounting

that are most sensitive to the pandemic factor.

We have offered practical proposals for

improving accounting, management accounting for

some of its objects, which are most sensitive to the

impact of COVID-19. Regarding the accounting of

inventory, a model of factor analysis of losses from

their depreciation has been proposed, which

provides an opportunity to allocate from the total

amount of additional costs of the period caused by

individual factors, including a pandemic. It is also

recommended to open appropriate sub-accounts for

analytical accounting of losses from depreciation of

inventories as a result of impact to coronavirus. The

article provides practical guidance on reviewing key

accounting judgments and assumptions in

determining the amount of expected credit loss

(ECL) on financial assets, which should simplify the

factor analysis of the impact of individual factors,

including COVID-19. To accumulate and

systematize information on impairment losses on

financial assets due to the impact of coronavirus, it

is proposed to open separate sub-accounts of

expenses by type of financial assets. The paper

presents a detailed analysis of the impact of

coronavirus on the provisions of future payoffs and

payments, in particular on the provisions for

onerous contracts and legal risks. The suggestions

for improving the calculation of the size of the

reserve in conditions of significant uncertainty, high

risk and the possibility of implementing several

scenarios have been given. In turn, it has been

proposed to open separate sub-accounts of costs for

the systematization of information by impact

factors, including COVID-19, by type of provisions.

These proposals improve the accounting and

analytical accounting of inventories, financial

assets, provisions for future expenses and payments,

strengthening the accounting function for analytical

support of management decisions and financial

reporting. The proposed model of factor losses

analysis against inventories depreciation allows

determining the impact of factors, in particular

COVID-19, on the amount of costs, and accordingly

helps to develop the measures to minimize the

negative impact of these factors on financial

condition and activity of a company. Practical

recommendations for reviewing the amount of credit

risk of financial assets, as well as for calculating the

amount of provisions for future payoffs and

payments in conditions of significant uncertainty

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DOI: 10.37394/23207.2022.19.124

Valerii Zhuk, Stanislav Vasylishyn,

Oleg Kantsurov, Oksana Prokopyshyn,

Yevhen Stupnytskyi

E-ISSN: 2224-2899

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Volume 19, 2022

and risk, strengthen the methodological basis for

more prudent and balanced accounting estimates,

which ultimately leads to more accurate disclosure

and quality of financial reporting of companies. The

proposed new analytical sub-accounts will improve

the work plan of the accounts of the enterprises

whose activities are significantly affected by

COVID-19.

The research results improve the quality and

transparency of financial and non-financial

reporting of businesses affected by the effects by the

global COVID-19 pandemic, meeting the

information needs of stakeholders at various levels.

Approbation of the proposed approaches in

Ukrainian business will allow achieving the mission

of the Institute of Accounting in the context of

achieving trust, understanding and control in the

society.

Depending on the research questions being

sought, there are (will be) challenges for some

accounting research to isolate the broader contextual

effects associated with the COVID-19 crisis

(Troshani, 2020). Covid-19 has brought challenges,

but also opportunities for future qualitative

accounting research, both in terms of research

settings and questions, and in terms of new methods

and practices (Molinari & De Villiers, 2021). The

prospects for further research are to improve the

proposed models and practical recommendations, as

well as the development and practical testing on

their basis of accounting and analytical models for

assessing possible future risks of the COVID-19

pandemic for management purposes and to disclose

risk assessment in financial reporting. It is also

planned to develop separate accounting registers to

calculate the amount of impairment of inventories,

expected credit losses, and provisions for future

payoffs and payments according to impact factors.

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Contribution of Individual Authors to the

Creation of a Scientific Article (Ghostwriting

Policy)

Valerii Zhuk, Stanislav Vasylishyn - statistical

research.

Oleg Kantsurov, Oksana Prokopyshyn - section 3.

Yevhen Stupnytskyi - generalization, design of

research materials.

Sources of Funding for Research Presented in a

Scientific Article or Scientific Article Itself

Funding from the authors of the article.

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WSEAS TRANSACTIONS on BUSINESS and ECONOMICS

DOI: 10.37394/23207.2022.19.124

Valerii Zhuk, Stanislav Vasylishyn,

Oleg Kantsurov, Oksana Prokopyshyn,

Yevhen Stupnytskyi

E-ISSN: 2224-2899

1393

Volume 19, 2022