With the coronavirus pandemic affecting all aspects of life, business leaders should be prepared for the impact it will have on the estimates used within the financial reporting process. Such changes will apply to the upcoming quarterly filings for most public companies.
Below are the areas within financial statements that may be significantly affected by the economic downturn caused by COVID-19:
- Revenue Recognition. Given reduced customer spending and supply chain disruptions, companies may be induced to modify the terms of existing contracts, which may affect revenue recognition. Companies offering discounts or rebates should assess estimates involving variable considerations; companies offering extended payment terms should assess whether the contract contains a financing component. Existing contracts should also be reassessed for collectability, as revenue can be recognized only when collection of consideration is deemed probable.
- Accounts Receivable. Companies should analyze the collectability of accounts receivable given current or near future trends and collection patterns. Additional consideration of the future trends and expected credit losses is necessary for filers who already adopted ASU 2016-13, Financial Instruments—Credit Losses.
- Inventory. Current or near future trends may cause certain inventory to be slow-moving and trigger the need to review for inventory obsolescence. Any discounts offered on the product or lower commodity prices may affect valuation of inventory, which is measured at the lower of cost or net realizable value.
- Investments. Valuation of investments held may be affected due to market trends, which may trigger write-downs or impairments.
- Goodwill, Intangible Assets and Other Long-lived Assets. The economic fallout, including declines in many companies’ stock prices, may trigger an interim impairment analysis. Additionally, while not required under US GAAP, a publicly traded company should reconcile the fair value of its reporting units to its stock price and market capitalization to corroborate its fair value estimates.
- Income Taxes. Companies that recognize a deferred tax asset due to a benefit of net loss carryforwards, should reassess whether a valuation allowance is needed; the updated projections may no longer show future net income to offset the net loss carryforwards.
- Liquidity, Compliance with Covenants. If COVID-19 has affected an entity's projected normal levels of cash inflows from operations or its ability to access cash, additional liquidity disclosures and assessment as to whether the entity is able to continue as a going concern are needed. Declines in revenues and other financial results may trigger noncompliance with debt covenants.
Other disclosures affected by COVID-19
On March 25, the staff of the SEC’s Division of Corporation Finance published CF Disclosure Guidance: Topic No. 9, Coronavirus (COVID-19), which, among other matters, discussed issues relating to earnings releases and filings where GAAP financial statements are required, such as filings on Form 10-K or 10-Q. If a company presents a non-GAAP financial measure or performance metric to adjust for the impact of COVID-19, its disclosure should explain why using such metric is useful in assessing the impact of COVID-19. Form 10-K or 10-Q that disclose a non-GAAP financial measure should also contain reconciliation to GAAP results.
If you have questions about COVID-19’s impact on your financial reporting, contact a Friedman professional today.