Financial Reporting Considerations of the Coronavirus Pandemic
This article will summarize some of the key financial reporting implications of the Coronavirus pandemic impacting 2020 financial reporting as well as December 31, 2019 financial statements still being finalized.
The Pandemic is considered to be a nonrecognized subsequent event, meaning the pandemic event is deemed to have started after December 31, 2019, and therefore did not exist as of the balance sheet date. The pandemic most likely does not result in any adjustments to the December 31, 2019 financial statement operating results or financial position. However, any company which has not yet finalized its December 31, 2019 year-end financial statements should look to the FASB’s Accounting Standards Codification (ASC) 855, “Subsequent Events” for guidance on the disclosure requirements of known and potential future impacts of the coronavirus on an entity’s future operations, financial position and related risks and uncertainties.
Going Concern Uncertainties
ASC 205-40 requires management to assess an entity’s ability to continue to finance its operations and have sufficient liquidity to meet its obligations for the one year period from the date the financial statements are available to be issued. The Coronavirus may result in conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern for the following twelve months, resulting in additional disclosures as required by ASC 205-40. Also recall that ASC 275 requires disclosures related to risks and uncertainties, which would include the Coronavirus’s impact on certain changes in estimates and vulnerabilities to certain concentrations. Depending upon the outcome of management’s assessment and the conclusions about the company’s ability to continue as a going concern, the auditor may be required to include an “emphasis of matter” paragraph in the auditor’s report.
Debt Covenant Issues
Companies must review the pandemic’s impact on future cash flows, results of operations and financial position to determine if it will continue to meet its financial covenants and other requirements included in its bank or other financing agreements. Companies may need to either amend terms of their agreements or seek waivers for any events of noncompliance. Companies may need to assess if any such changes to their financing agreements represent a modification or extinguishment of debt under ASC 470-50 or a troubled debt restructuring under ASC 470-60.
Companies should consider whether long-term debt needs to be classified as current because of a covenant violation or other default at the balance sheet date in accordance with ASC 470-10-45.
Revenue recognition under ASC 606 requires an analysis of the likelihood of collection up front from a customer, which could impact the timing of certain revenue transactions, if collection is not deemed probable. Determining whether a customer has the ability and intention to pay substantially all of the promised consideration is a key part of determining whether a contract exists with the customer.
Asset Valuation and Impairment
For 2020 financial statements, management will need to carefully assess the effects of business disruptions and economic conditions on the valuation and realizability of many assets. Following are some of these considerations.
Careful assessment of reserves and write-offs for credit losses will be required. Detailed analysis beyond reviewing historical trends will likely be required.
ASC 330-10-35 addresses the subsequent measurement of inventory and may result in losses if the net realizable value or in certain cases the utility is less than cost. Companies should also review their firm purchase commitments for similar inherent losses.
A Company’s future earnings and cash flows may be negatively impacted by the Coronavirus, resulting in potential impairment of goodwill. ASC 350-20-35-30 states “goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.” Even if a private entity has elected to amortize its goodwill using the private company alternative it still is also required to reassess goodwill upon a triggering event such as the economic effects of the Coronavirus Pandemic.
Other Long-Lived Assets
Other long-lived assets including both tangible and intangible assets must be tested for recoverability when events or circumstances indicate their carrying value may no longer be recoverable. Such adverse events include negative change in the business environment, declines in market prices or similar conditions.
Deferred Tax Assets
Deferred tax assets should be further evaluated to ensure the assets remain fully realizable. A soon to expire net operating loss or credit carryforwards may require additional analysis to support management’s conclusion that it is more likely than not the assets will be utilized before expiration.
Accounting for Income Taxes
On March 27, 2020, the Coronavirus Aid Relief and Economic Security (CARES) Act became law. There are many changes in the law favorably impacting corporations. These changes may have a significant impact on a Company’s income tax provision. ASC 740-10-45-15 requires a company to include the effects of any tax law change in the financial statement period which includes the date of enactment.
The above summary represents some common considerations. The impact of the Coronavirus on a company’s financial reporting will likely vary significantly based on individual circumstances and industries. Please reach out to your BNN advisor for assistance discussing the reporting implications in further detail. We are here to help.
For more information, please contact your BNN tax advisor at 800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.