While millions of businesses in the United States are grappling with the economic impact of COVID-19 and the uncertainly that lies ahead, there are potential items resulting from the pandemic that you need to consider as part of your financial reporting. You need to keep these in mind when reporting financial information to third parties. If you don’t present financial statements to third parties during the year, these may have an impact to your next annual financial statements that will be issued.
You are required to asses whether there are conditions and events that raise substantial doubt about your company’s ability to continue as a going concern. If conditions and events are identified, you must disclose those as part of full-disclosure financial statements. This is needed regardless to whether your plans alleviated the substantial doubt. If substantial doubt is not alleviated by your plans, further disclosures are required.
Long-lived assets, including property and equipment, intangible assets and goodwill require a qualitative assessment to determine whether there is an indication that an asset may be impaired. If any of the qualitative factors are identified, which likely may be the case with the varying impacts from COVID-19, amortized intangible assets and property and equipment that are to be held and used need to reviewed to determine if the carrying value of the assets are recoverable from future operations. If they are not recoverable, an impairment loss will be recognized by the amount that the carrying amount of the asset or asset group exceeds its fair value. An impairment loss of intangible assets not subject to amortization will be measured the same way, however, there is no quantitative assessment for these to determine if the asset value is recoverable. Impairment considerations for goodwill varies more due to changes in Accounting Standards over the years and will be covered in a future blog.
In addition, impairment of other assets such as inventory (lower of cost and net realizable value or reserves for excess and obsolete inventory) and deferred tax assets (valuation reserves) may need to be considered.
Many businesses have been provided lease concessions from the lessors of the property they lease. In order to ease the accounting requirements associated with lease concessions, the FASB has recently put out a staff question-and-answer-document (link) that focuses on the application of the lease guidance for lease concessions that result from COVID-19.
Under existing Accounting Standards, a trouble debt restructuring would have been deemed to occur when a creditor, for economic or legal reasons related the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. However, FASB has stated that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who where current on the debt prior to any relief, would not be considered troubled debt restructurings.
Risk and uncertainties
For calendar-year end entities, the financial impact of COVID-19 would have been considered a Type II subsequent event that would have required disclosures to the financial statements but no impact to amounts reported on the December 31, 2019 financial statements. However, for fiscal year ends, in addition to considerations noted above, disclosures may need to be included with your annual financial statements that discuss how COVID-19 has impacted the company. Furthermore, disclosures should be included for any estimate of financial statement effect for the pandemic as it continues past your fiscal year end and any uncertainties to your company related to the reopening of the economy.
In summary, the nature of the financial reporting considerations related to COVID-19 will be unique to each company and industry and could be more wide-ranging that those outlined above. Therefore, you need to be mindful of transparent financial reporting when providing your financial statements to third-parties who will be relying upon them.
Jonathan Poppel, CPA