Financial Reporting in the Time of COVID-19 – What you need to know

Financial Reporting Considerations

We’ve reviewed the accounting and reporting issues that are likely to be the most prevalent and challenging. Below are some considerations that must be addressed before completing year-end financial statements:

• Preparation of forward-looking cash flow estimates. There are unique complexities associated with preparing forward-looking information as a result of COVID-19. For example, the ultimate course of the pandemic and the time needed for a return to normalcy are unknown. The economic impact of the pandemic will result from variables that are impossible to accurately predict. However, entities will still need to make good-faith estimates, prepare documentation supporting the basis for these estimates, and disclose key assumptions used and their sensitivity to change.
• Impairment of nonfinancial assets. Companies may need to assess whether the impact of COVID-19 has led to an asset impairment. Nonfinancial assets, like long-lived assets, intangibles, and goodwill, require recoverability and impairment models dependent on the development of cash-flow projections that are subject to uncertainties.
  Indicators of impairment include significant changes with adverse effects that have taken place, or will take place in the near future. These include changes in the market or economic environment in which the business operates and the extent to which an asset is used or is expected to be used (e.g., plans to restructure the operation to which an asset belongs).
• Accounting for financial assets. There have been severe declines in the fair value of many financial assets due to COVID-19. In addition, debtors’ ability to comply with the terms of loans and similar instruments has been negatively affected.
• Modifications to contracts. Changes in economic activity associated with COVID-19 will motivate many companies to renegotiate the terms of existing contracts. For example, contracts with customers; employee compensation; leases; and the terms of financial assets and liabilities.

Subsequent Event Disclosure

When considering how your company should report the effects of COVID-19 on financial statements, you must differentiate between two types of subsequent events:

1. Recognized subsequent events. These provide evidence about conditions that existed at the balance sheet date, such as bankruptcy or pending litigation. The effects of these events must be recorded in financial statements.
2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the time of the balance sheet. They arose afterwards but before the financial statements are issued. Such events should be disclosed in footnotes, including the nature of the event and an estimate of its financial effect (or state that such an estimate can’t be made).

The World Health Organization declared the COVID-19 outbreak a public health emergency on January 30, 2020; however, events that caused the outbreak occurred before the end of 2019. Calendar-year entities may need to recognize the effects in their financial statements for 2019 and the first quarter of 2020.

Going-Concern Assessment

Due to the impacts of COVID-19, there may be substantial doubt regarding a company’s ability to continue to operate as a going concern.

Management must determine if preparing financial statements on a going-concern basis is appropriate. Do events or conditions cast significant doubt on the company’s ability to continue as a going concern? FASB standards require that management look 12 months beyond the date financial statements are issued, and assess whether there is substantial doubt about their ability to continue as a going concern.

Although some industries have been more severely affected than others, all companies must consider potential implications for the going-concern assessment.