Financial Reporting in the COVID-19 Era: Technology Can Help Accounting Professionals Ask—and Answer—the Right Questions
To address the many accounting and financial reporting challenges triggered by COVID-19, accounting professionals must know what to watch for when preparing financial disclosure statements this year—and how technology can guide and empower them in the process.
Understanding the key accounting questions raised by COVID-19
One of the most intimidating tasks facing companies’ financial representatives today is the urgent need to provide extensive disclosures detailing the pandemic’s impact and how that risk is being managed. Several accounting matters—including going concern considerations, impairments, fair value measurements, debt, and revenue recognition—must be navigated through a new lens given the impact of COVID-19.
Going concern and liquidity
The first and most important topic to address is going concern and liquidity. Basically, this is an evaluation of your company’s chance of survival. If an assessment of financials reveals substantial doubt about your ability to continue as a going concern, the reasons why must be reported, as well as any actions your company plans to take to address the adverse circumstances or events that have affected it.
Reporting entities may have to revise their disclosures about liquidity risks to let investors know how they are managing their liquidity while dealing with the COVID-19 crisis. Expect heightened scrutiny this year, particularly when it comes to whether or not your company can continue to meet its financial obligations and whether financial challenges represent anexistential threat. Do you have a shortage of working capital? Are you in compliance with requirements? Do you have sufficient cash flow from operations to cover your debt obligations? Are you able to pay dividends or payments on lines of credit from suppliers? Are you able to meet customer orders?
If needed, look to reduce expenses, sell assets, and consider restructuring debt, leases, or other contractual obligations. Raising capital is also an option. And remember to pay particular attention to this area in regard to your disclosures this year.
Impairments are a complex accounting area, and a number of questions have to be considered in light of COVID-19. Because goodwill numbers tend to be large, this could also be an area of intense scrutiny this year. If you haven’t already, expect to have a robust discussion about impairments with auditors.
For many companies, COVID-19 may be a triggering event, requiring a test for goodwill impairment. With many inputs being highly volatile and difficult to predict, determining whether goodwill is impaired is not easy.
Whether it’s an economic decline or changing industry regulations, ask yourself if COVID-19 has triggered an interim goodwill impairment test. A triggering event could also include increases in cost brought on by adding new supplier sources or paying higher wages for essential workers. A decline in market capitalization is also a factor to consider when determining whether a triggering event for an impairment test has occurred.
From a financial instrument perspective, the pandemic has impacted many factors involved in measuring credit losses, creating a great deal of uncertainty about the estimates accountants may use. When reporting credit losses, ask yourself which accounting method is being used (e.g., discounted cash flows, loss rate, roll rate, or probability of default). Does any pool of assets need to be readjusted to reflect changes in the risk characteristics of the assets? Are there any Purchased Financial Assets with Credit Deterioration (PCD assets) on the books? Many risk characteristics are changing this year and estimates must be principles-based and require a lot of judgment.
Fair value measurements
While unstable market conditions brought about by the COVID-19 pandemic may justify a change in valuation techniques and inputs, the rationale behind the change must be explained and disclosed. Has the coronavirus changed how the fair value of assets is being measured? Have fair value measurements under COVID-19 affected the entity’s fair value hierarchy? If so, changes may need to be highlighted and clarified in disclosures because stakeholders will want to understand the logic behind the changes.
Debt and PPP
Coronavirus-related debt restructuring, re-negotiating, payment deferrals, or federal loans received through the Coronavirus Aid, Relief, and Economic Security (CARES) Act can raise a number of accounting questions. This can also include limitations and restrictions that might impact existing contractual arrangements.
If debt covenants were triggered, you may want to renegotiate some of your debt contracts. Otherwise, some or all of the debt may have to be reported as current. Due to COVID-19, many lenders are open to restructuring, however, some modifications may have to be treated as troubled debt restructurings. Further, if market volatility has affected the fair value of the collateral that secures your business’s debts, the value of the collateral may no longer be sufficient.
Because revenue recognition is the top line of the income statement, it’s the first thing analysts look at. This year, more than ever, it’s important to get it right.
The new revenue recognition standard is now a five-step process that includes conditions that may prevent companies from recognizing revenues or parts thereof during the coronavirus pandemic. Is collectability of revenue an issue? Have refund or return policies changed? Are contracts still expected to be completed on time? Are there any new goods or services offered to customers in light of the pandemic? Have the terms of customer contracts been otherwise modified?
Many companies have modified contracts with customers due to mandated closings and related regulations. Accountants must be prepared to consider these accounting implications.
Preparing your financial disclosure statements
Once you’ve prepared all of your accounting memos for the year, you can turn your attention to disclosure statements. Needless to say, 2020 has been an unprecedented year, so a simple roll-forward of your footnote disclosure won’t cut it.
In terms of guidance and deferrals, the SEC is acknowledging the pandemic’s impact on businesses, financial conditions, and operational results. Companies are encouraged to provide disclosures that allow investors to evaluate the current and expected impact through the eyes of management and to proactively revise and update disclosures as facts and circumstances change.
When it comes to management projections, it is important this year to disclose significant details describing the pandemic’s impact on the business and how risk is being managed. While the SEC is continuing to issue regular guidance on how to factor coronavirus risks into reporting and disclosure practices, the ever-changing nature of the situation has made it difficult—and sometimes impossible—for many businesses to predict what the ultimate impact will be. And that’s where technology comes in.
How Checkpoint Edge can help you keep pace
To manage pandemic-induced uncertainty, many accounting professionals are turning to software providers who offer trusted guidance and advanced technology to keep pace with the latest COVID-19 developments.
Checkpoint Edge combines artificial intelligence, cognitive computing, and machine learning with the tax and accounting expertise of an esteemed editorial staff to provide up-to-the-minute guidance, practical insight, and even SEC ﬁlings/disclosures from peer companies.
To learn more about how Checkpoint Edge can help you regain control of your accounting and financial statements, watch our latest webcast Financial Reporting in the Times of COVID-19.
For specific additional resources, visit our Expert Financial Reporting & Management Guidance and Tools Choice Package and check out our COVID-19 Tax and Accounting updates.