Financial Reporting Considerations Related to COVID‐19By Michele Amato | April 21, 2020
During these tumultuous times, questions have arisen regarding the impact of COVID-19 on financial reporting. The following is a review of accounting matters and financial reporting issues related to COVID‐19 designed to assist management in preparing an entity’s financial statements.
Risks and Uncertainties
Under Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) 275, “Risks and Uncertainties,” disclosures are required focusing primarily on risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term or the near‐term functioning of the reporting entity. These risks and uncertainties can result from the nature of an entity’s operations, the use of significant estimates and current vulnerabilities due to certain concentrations. COVID‐19 may have a negative effect on significant estimates and exacerbate a vulnerability due to certain concentrations. Examples of such concentrations include specific markets or geographical areas in which the entity conducts its operations, diminishing volume of transactions with a particular customer or a supplier, or limited supply of material or availability of labor or services.
The consequences of COVID‐19 may represent subsequent events under FASB ASC 855, “Subsequent Events,” which defines subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.
The two types of subsequent events are:
- events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (i.e., recognized subsequent events); or
- events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (i.e., unrecognized subsequent events).
For financial statements in calendar year-end 2019, any identified COVID‐19 related subsequent events are likely to be deemed nonrecognized subsequent events. For some unrecognized subsequent events, financial statement disclosure is required to prevent the statements from being misleading, in which case the financial statements must disclose (a) the nature of the event or events; and (b) an estimate of the financial statement effect of the event or events, or a statement that the estimate cannot be made.
Under FASB ASC 205‐40, management must evaluate an entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or available to be issued, when applicable). Substantial doubt arises about an entity’s ability to continue as a going concern when conditions and events, considered in the aggregate, indicate that the entity will probably not be able to meet its obligations as they become due within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Disclosures must be made in the notes to the financial statements if management determines there is substantial doubt or that its plans alleviate that substantial doubt.
An entity’s ability to continue as a going concern is affected by many factors, including the industry and geographic area in which it operates, the financial health of its customers and suppliers and its access to financing. COVID‐19 may impact those factors and cause an entity’s operating results and financial position to deteriorate. The look‐forward period is one year from the date the financial statements are issued (or available to be issued, when applicable). With rapidly changing circumstances and severe economic impacts due to COVID‐19, it may be very difficult for management to evaluate conditions or events that may impact the entity’s ability to continue as a going concern under U.S. generally accepted accounting principles (U.S. GAAP).
COVID‐19 may cause business and production disruptions, supply chain interruptions, negative impacts on customers, volatility in the equity and debt markets, reduced revenue and cash flows, and other economic consequences. Entities whose operations are negatively affected by COVID‐19 may need to consider testing their assets for impairment.
Long‐lived assets to be held and used (including property, plant, and equipment, finite‐lived intangible assets, and right‐of‐use assets recognized under FASB ASC 842, “Leases”) are tested for impairment according to the guidance in paragraphs 17‐35 of FASB ASC 360‐10‐35. FASB ASC 360‐10‐35‐21 requires testing for recoverability (which involves comparing undiscounted cash flows for a long‐lived asset or asset group being evaluated with the carrying amount of that asset or asset group) whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The following are examples of such events, as suggested by the AICPA:
a. A significant decrease in the market price of a long‐lived asset (asset group)
b. A significant adverse change in the extent or manner in which a long‐lived asset (asset group) is being used or in its physical condition
c. A significant adverse change in legal factors or in the business climate that could affect the value of a long‐lived asset (asset group), including an adverse action or assessment by a regulator
d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long‐lived asset (asset group)
e. A current‐period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long‐lived asset (asset group)
f. A current expectation that more likely than not, a long‐lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent. FASB ASC 360‐10‐35‐17 states that an impairment loss should be recognized only if the carrying amount is not recoverable and exceeds fair value. An impairment loss should be measured as the amount by which the carrying amount exceeds fair value.
Given the impact of COVID‐19, many entities may conclude that they should test their long‐lived assets to be held and used for recoverability. Under FASB ASC 360‐10‐35‐22, it also may be necessary to review depreciation estimates and method or the amortization period when such assets are tested for recoverability.
About Michele Amato
Michele B. Amato, CPA, is the Partner-in-Charge of the Professional Standards Group at Marks Paneth LLP. With more than 30 years of experience at both national and regional firms, she has an extensive background in accounting and auditing, SEC compliance and quality control. Ms. Amato also has extensive experience guiding clients through initial public offerings, reverse mergers, private placements, and spin-offs. Ms. Amato is highly regarded for her technical expertise in the engagement quality review... READ MORE +