The COVID-19 pandemic is creating economic implications across the globe. While the extent and duration remain unclear, companies should consider the following financial reporting implications:
Companies that have not yet issued their annual financial statements should evaluate the impact of the COVID-19 pandemic as a non-recognized subsequent event. A non-recognized subsequent event is one which the conditions did not exist as of the reporting date, therefore requires disclosure of the nature of the event and the related financial statement estimated effect, or the fact that an estimate cannot be made. Every company is impacted; however, those that are more significantly impacted should also consider disclosing additional significant estimates or vulnerabilities due to concentrations with particular customers, suppliers or geographical regions.
Future Cash Flows / Potential Impairments
Detailed cash flow projections will become an important component of asset impairment considerations. Companies should utilize these forward-looking estimates to address a number of new reporting considerations including:
Accounts Receivable – Many privately held companies recently adopted ASU 2014-09 – Revenue from Contracts with Customers, which was first effective for calendar year financial statements ending December 31, 2019. This new standard requires companies to evaluate the existence of a customer contract to determine that it is probable the entity will collect substantially all of the consideration to which it will be entitled in exchange for the good or service. This is generally not reassessed after contract inception unless there has been a significant change in facts and circumstances. If the impacts of the Covid-19 pandemic result in a significant deterioration of a customers’ or a portfolio of customers’ ability to pay, some Companies should reassess collectability and revenue may need to be adjusted to reflect an amount that at that time is least probable to be subsequent reversal.
Inventory – New management considerations regarding maintaining good internal control over inventories as routine observations may be temporarily suspended. Companies should also evaluate inventory for possible obsolescence considering possible spoilage or expiration of inventory for certain industries.
Financial Assets – Subsequent market decline is generally not recorded unless the decline is determined to be an other than temporary impairment. While certain investment concentrations may result in additional risk and therefore expanded disclosures, many are covered by the existing general risk and uncertainties disclosures already included in financial statements with investments exposed to various risks, such as overall market volatility.
Intangibles and Goodwill – These non-financial assets are generally evaluated for impairment annually and whenever events or changes in circumstances indicate the carrying amount may not be fully recoverable. As with many of the other assets discussed above, additional analysis should be performed to consider if there are possibly loss contingencies and if the underlying event took place after the reporting date, additional disclosures should be considered.
Financing Considerations – As the risk of covenant failures increases in the subsequent reporting period, consideration should also be made regarding subsequent financing changes which may result in long-term debt being reported as a current liability or overall debt restructuring disclosures if there are subsequent changes to terms such as extended maturities, changes in payment terms or overall covenant modifications.
The above includes only a few areas requiring additional consideration. Certain loss contingencies may need to be accrued in addition to the expanded disclosures depending upon the facts and circumstances. For guidance on your particular circumstance, please contact your CPA, or reach out to a member of our professional team.