As the world continues to navigate the health, business, and economic threats that the COVID-19 pandemic brings, a new concern arises as companies look to report their financial results. Financial reporting uses financial statements to present financial data and disclosures that indicate the financial health of a company during a specific period of time, which often ends on December 31. Accurate and timely information is critical for management decisions about the company’s future and provides information to creditors and investors about the profitability and financial stability of the company. There are several key considerations that must be evaluated to accurately depict financial results and apply the current accounting standards.
Asset impairment assessment
Based on current accounting guidance, many companies will conclude that COVID-19 will be deemed a triggering event and will be required to evaluate for asset impairment. Characteristics of a triggering event include declines in economic conditions that can be traced to a significant event or unfold over a period of time. An asset is impaired when a company is not able to recover its carrying value, either by using it or selling it. This will require management to forecast future cash flows and evaluate subsequent performance relative to those forecasts. Disclosure of the policies on how these assets were evaluated is going to be necessary for users to understand the potential implications of the pandemic on the company.
Going concern and liquidity
Management is charged with assessing the company’s ability to continue as a going concern and whether it is appropriate. This assessment will need to be supported by subsequent contracts or changes that can be shown to lead to improved cash flows and revenue. The degree of support and disclosure will vary as each company will be impacted differently.
During the height of the pandemic with closures and stay-at-home orders, lessees may have negotiated lease concessions, which include rent deferrals and rent forgiveness. In April 2020, the FASB staff issued a Q&A, providing some clarity on accounting for lease concessions, which can be an election for those modifications due directly to COVID-19. Additional analysis, documentation, and disclosure will be needed to present an accurate depiction of current and future obligations related to these contracts.
Evaluating the accounting related to the relief measures introduced by the government can be challenging as they may fall within the scope of the standards related to income tax, government grants, debt, and contingent liabilities. Working with your accounting firm to understand the nuances of each and the impacts on both financial reporting and income taxes will be important in order to make the best decision for your company. Adequate disclosures will also be necessary so that the user of the financial statements can understand the position taken.
Financial reporting may never have been as critical as it is now in allowing for transparent communication between a company and the users of the financial statements, given these unprecedented times. We can help. Give us a call at 816-743-7700.