As organizations monitor the current and potential effects of COVID-19 on their activities, they should also consider the implications on their year-end financial reporting processes. Specifically, organizations should consider the following areas of concern in preparing financial statements.
Organizations should evaluate the impact of changing circumstances on their assessments of risks inherent in an organization’s operating activities and its financial reporting, including:
- Changes in demand for products or services
- Changes in the availability of goods and services from your suppliers
- Business interruption from government restrictions
- Management of workforce and legislative changes
- Cash flow and business liquidity
- Access to new SBA loans, Federal Reserve loans, and other government initiatives
- Closure or relocation of operations
- Price volatility in markets (e.g., stocks, commodities, foreign currency)
- Protecting against fraud and cyberattacks
Organizations should consider whether changes in circumstances affecting risk assessments, including economic uncertainties and market volatility, have affected or will affect accounting conclusions and whether key assumptions and sensitivities should be re-evaluated. Areas for consideration of accounting and adequacy of disclosures include:
- Potential inventory write-downs and impairment losses;
- Changes in credit risk of customers or others;
- Changes in the fair values of financial and nonfinancial assets and liabilities;
- Changes in growth forecasts that may impact impairment evaluations (e.g., goodwill, other intangible assets), and evaluations of deferred income tax asset valuation allowances;
- Loan defaults or covenant violations, or amendments or waivers in loan agreements;
- Discontinued operations and assets held for sale; and
- Concentrations that become more relevant to the financial statements as a result of the impacts of COVID-19 (e.g., exposure to a concentration of customers in a hard-hit industry may increase credit risk).
Organizations should evaluate whether events occurring after year-end but prior to issuance of the financial statements require disclosure or possibly recognition in accordance with Accounting Standards Codification (ASC) Topic 855, Subsequent Events.
Disclosure of a loss, or a loss contingency, arising after the date of an organization’s financial statements but before those financial statements are issued, as described in ASC paragraphs 450-20-25-6 through 25-7, may be necessary to keep the financial statements from being misleading if an accrual is not required. If disclosure is determined to be necessary, the financial statements shall include both of the following:
- The nature of the loss or loss contingency, and
- An estimate of the amount or range of loss or possible loss or a statement that such an estimate cannot be made.
Occasionally, in the case of a loss arising after the date of the financial statements, if the amount of asset impairment or liability incurrence can be reasonably estimated, disclosure may be best made by supplementing the historical financial statements with pro forma financial data. This gives the effect to the loss as if it had occurred at the date of the financial statements. It may be desirable to present pro forma statements, usually a balance sheet only, in columnar form on the face of the historical financial statements.
Use of Estimates:
The impact of the pandemic may result in a reasonable possibility that estimates will change by a material amount in the near term. Changes in circumstances that result in a material change in estimate should be disclosed in the financial statements.
The impact of COVID-19 on an organization may, in combination with other facts and circumstances, raise substantial doubt about the organization’s ability to continue as a going concern. Such circumstances should be evaluated under U.S. GAAP in ASC Subtopic 205-40.
Access to Information and Internal Controls:
Organizations need to have access to their own locations that accumulate financial information for purposes of preparing consolidated financial statements as well as financial or other information from equity method investees, guarantors, and acquired or to be acquired businesses. Organizations should consider the effects that any limitations on such access will have on the preparation of its financial statements.
Organizations that experience significant disruptions to operations or access to offices and travel, may need to modify the organization’s internal controls. Changes to internal controls could include, changes to personnel or functions, shifting of reporting lines or altering access to IT systems to enable a remote workforce to operate virtually. Such changes have the potential to increase the pressure on the effectiveness of existing controls.
For more guidance on these issues and more, contact a CRI professional.