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How Will COVID-19 Affect Financial Reporting?

06.10.2020

In recent months, businesses have been concerned about how the COVID-19 pandemic will affect their financial results.

Global impact

Though the full effects and length of the COVID-19 outbreak are yet unknown, the impact is already global. Every business is affected in some way.

U.S. companies, large and small, are devising contingency plans and reworking their goals and budgets to address potential risks. Likewise, investors and other stakeholders want to know how companies are responding to this emerging risk factor.

Possible financial effects

Under GAAP, U.S. companies will be required to factor COVID-19-related risks into their financial statements. Examples of balance sheet accounts that may be materially affected by the outbreak include:

Financial assets. Companies should consider the potential for impairment, as well as the need to adjust cash flow projections and other assumptions used to measure nonquoted financial instruments. Financial assets reported at fair value on the balance sheet may result in realized and unrealized losses.

Receivables. Customers that are adversely affected by the outbreak may be unable to pay outstanding invoices. This situation could result in additional credit and liquidity risks, higher than usual bad debt, and even impairments, write-offs or revenue derecognition.  Cash flows from operations may also be affected.

Inventory. The outbreak may disrupt supply chains and productivity. Companies with reduced or idle production capacity may be unable to allocate overhead costs to inventory as they usually do. In addition, inventory that can’t be turned over may have to be evaluated for impairment. Finally, changes in prices and reduction in the level of demand will also have to be taken into consideration.

Pensions and other post-retirement plans. Financial market volatility has affected the measurement of these accounts. Companies may have to revisit both the expected return on plan assets and the funded status of the plans.

Deferred tax assets. If estimates of earnings change, companies may have to reconsider some of their tax strategies, or they may not be able to realize all deferred tax assets.

Goodwill and other indefinite-lived intangible assets. Companies may see their revenues or net income affected by the outbreak. This may trigger impairment testing for goodwill and other intangibles. The reassessment of key accounting estimates and projections may result in an immediate impairment. Additionally, impairment testing may have to be done more than once this year if management considers that evolving circumstances result in more than one triggering event.

Going concern disclosures. The difficulty in forecasting the future impacts of the pandemic on a company’s ability to continue as a going concern will lead to more time and effort in applying this GAAP principal. Management must evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt.

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There are many unknowns about the severity and duration of the COVID-19 pandemic. Disclosing and recognizing its financial effects may require management to exercise significant judgment. Contact your CPA to help navigate this potential crisis and its effects on your company’s financial statements.

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