By now, we are all aware of the Coronavirus pandemic and the impact it is having on our lives, including the impact on businesses and the overall economy. Companies are working remotely, where possible. Disruptions to vendor and customer bases, market value declines and day-to-day changes in the global economy are also creating broad impacts to companies’ operations.
At this point, the general impacts on operations for most companies are known through media coverage and changes in our daily lives, but most of us may not be fully aware of the impact on financial reporting. We have summarized a few financial statement considerations:
- Financial close procedures and financial reporting are likely to be impacted due to unexpected changes in communications and/or changes in the availability of resources or changes in procedures normally used in the process. Delays in the close process and financial reporting can also be limited or avoided with appropriate planning and regular communications among internal team members and with external auditors and proper monitoring of controls, ensuring that new controls are effective and timely corrective alterations to policies.
- Revenues may be impacted on several levels. With the implementation of FASB Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), additional assessment will be required in regards to collectability and any variable consideration. ASC 606 disallows recognition of revenue if it is likely the amounts are to be reversed in subsequent periods. A careful consideration of customer specific issues, as well as larger economic issues arising from the Coronavirus pandemic may lead to a reduction in the amount of revenue recognized.
- Investments – significant declines in the market in 2020 mean realized and unrealized losses will be recorded on a majority of investments held.
- Companies with inventory are likely to be disrupted by changes in the supply chain and lack of availability of raw materials. This disruption of supply chain and raw materials will not only impact inventory on the balance sheet, but includes further implications on net income and the bottom line, as lack of inventory may lead to a decrease in sales, and companies will likely need to record higher inventory reserves, or write down inventory value, as certain inventory may be impacted by the lower of cost or net realizable value determination.
- Debt – Companies with debt may experience cash flow issues, and therefore lack the ability to make scheduled payments, which may lead to noncompliance with loan covenants. Companies with debt, especially those with financial covenants, should communicate with financial institutions to amend agreements and obtain waivers, as necessary, as failure to make payments or meet covenants will require disclosures within the financial statements.
- Management’s estimates – additional assessment will be required in light of COVID-19 and its related impacts. As noted above, estimates include, but are not limited to those related to revenue recognition under ASC 606, reserve for bad debts, as well as inventory, such as the level of reserves needed or amount of write down due to inventory obsolescence.
- Companies may need to revisit their going concern analysis prior to issuance of financial statements. This is especially important in light of the fact that going concern is required to be assessed for the 12-month period following the date financial statements are ready to be issued. Many companies will find the troubles stemming from the Coronavirus pandemic did not affect them during the period reported on within their financial statements, but may determine there will be significant financial impact arising in the subsequent period.
- For those companies who are currently preparing financial statements with fiscal years ended prior to the onset of the Coronavirus pandemic, they will need to report significant impacts caused by COVID-19 in the period between the fiscal year-end and the date of issuance. Such disclosures are required as subsequent events, or non-recognized events that should be disclosed if such events could significantly impact the Company’s operations. A review of recently issued financial statements shows that some companies have already put this into practice, with risk and uncertainty footnotes such as reduction in customer traffic, lower sales and gross margin, negative impact on interest income, disruption of supply chains and production, and general unpredictability related to duration of the pandemic and potential impacts to customers, vendors, and employees.
Ensuring the integrity of the financial statements during this time will require new ways of working together and new approaches to, and assessments of financial data. Constant internal and external communications will be vital for additional discussion and planning related to appropriate and timely measures to treat these issues. We are in this together. Contact your ASL team member to help you navigate through these uncertain times.
Below are some additional resources: