The accounting profession, like many others, has found itself thrust into a new reality shaped by the COVID-19 pandemic. With evolving standards, laws, and best practices, financial professionals are grappling with unprecedented uncertainty, making it challenging to navigate the profound impacts of the coronavirus on financial reporting.
The Inherent Uncertainty in Financial Statements:
Timothy Gearty, Vishal’s national lead instructor, emphasizes that financial statements are not an exact science but rely heavily on management judgment, which, in turn, is built upon the ability to forecast the economy. The ongoing pandemic has intensified this uncertainty, presenting significant challenges for Certified Public Accountants (CPAs) as they address various issues related to coronavirus and financial reporting.
The 5 Most Significant COVID-19 Financial Impacts:
CECL (Currently Expected Credit Loss):
Standardized in December 2019 for public companies filing with the SEC, CECL (to be implemented in December 2020 for all other organizations) shifts away from historical debt trends in forecasting. COVID-19 has added complexity to making reasonable and supportable forecasts about the future, especially concerning the long-term employment picture and its impact on customer demand.
With companies downsizing and seeking rent concessions due to financial hardships, accounting for such concessions becomes a vital concern. Determining whether concessions are lease modifications or variable lease payments poses a challenge in the context of COVID-19 financial reporting.
Variable Consideration in Revenue Recognition:
The uncertain nature of the pandemic has made estimating variable consideration, including discounts and rebates, more challenging. Actions taken in response to the pandemic may impact the estimated amount of variable consideration, requiring companies to reassess their revenue recognition strategies.
Payroll Protection Program (PPP):
As part of the federal stimulus program, accounting for funds received through PPP is a direct consequence of COVID-19. Deciding whether to treat it as debt or comply with International Accounting Standard (IAS) 20 and treat it as a government grant poses a dilemma for financial professionals.
Assessing Going Concern:
Companies must evaluate whether the economic downturn resulting from the pandemic affects their ability to continue as a going concern. Factors such as recurring operating losses, negative cash flows, and adverse financial ratios must be considered, making this one of the more complex issues related to the coronavirus financial impact.
Mitigating Risk in COVID-19 Financial Reporting:
Gearty emphasizes that risk associated with COVID-19 may impact asset impairment assessments, cash flow forecasts, liquidity determinations, restructuring cost estimates, and revenue streams. In response, CPAs must provide more detailed information in financial statement footnotes, avoiding boilerplate language. Regulators, such as the SEC, are encouraging a genuine analysis unique to each company in both footnotes and the management discussion and analysis (MD&A) section.
Key Elements to Include in Financial Statement Footnotes:
- Operational adjustments
- Changes in leadership
- Amendments to financial arrangements
- Financial impact of the CARES Act
- Early warning disclosures regarding asset impairment
- Inability to meet debt covenants
- Expected employee termination and restructuring charges
Financial professionals are grappling with the enduring impacts of the COVID-19 pandemic on financial reporting. The uncertainties introduced by the crisis demand a nuanced and thorough approach to address the challenges outlined. As the landscape continues to evolve, staying vigilant, providing comprehensive disclosures, and adapting to the dynamic environment will be crucial for navigating the uncharted territory of financial reporting in the post-pandemic era.