A range of financial reporting issues need careful attention during the COVID-19 pandemic. These issues are old news in the professional literature but need to be considered more intentionally.
The AICPA published a special report on March 18, 2020. The report, Consequences of COVID-19 Financial Reporting Considerations, was drafted by the Center for Plain English Accounting and is available at no charge.
On 3/14/29, I was Pondering impact of coronavirus prevention steps on financial statements. An auditor’s perspective. The AICPA report goes into far more detail.
Here, in bullet point italics, are the items mentioned for your focus, with a few of my comments for highlight:
- Subsequent Events
Type II subsequent events are those which take place after the financial statement date which are so significant that they warrant mention in the financial statements to keep those statements from being misleading.
- Subsequent Events – Market-Value Declines
A technical Q&A (TQA 9070.06) indicates there are some occasions that can arise which warrant adjusting financial statements based on subsequent declines in market value.
- Subsequent Events – COVID-19
Comment in the report indicates a number of 10-K filings by mid-March included disclosure of the pandemic. Five specific examples are quoted. Those comments refer to the pandemic and say there will be adverse impact on revenue or operating results, but the impact cannot be estimated.
- Accounting Estimates
- Asset Impairment
Report cites nine specific areas where there may be some impact.
For your daily brain stretcher, consider the impact on deferred tax assets from substantial declines in revenues in the next year or two.
How about intangibles, like goodwill? My brain hurts.
- Loss Contingencies
- Going Concern
Discussions exist in both the audit literature and review literature regarding going concern. See AU-C 570 and AR-C 90. Impact on industries such as restaurants, entertainment, airlines, and cruise ships is severe.
Report suggests that if conditions are extreme enough that it is difficult to make an assessment for a particular company it might be worthwhile (advisable is the exact word used) to delay issuing the financial statements.
Report quotes a going concern disclosure for an international movie chain. The first two paragraphs disclose the pandemic. The third paragraph discloses key assumptions made in a going concern analysis which include loss of all revenue for either one or three months, no reduction in fixed expenses, cutting capex by 90%, and halting dividend distributions after 7/1/20.
The fourth paragraph discloses it is possible major releases will be delayed until later in the year. Unstated implication is that even after theaters open, lots of people may skip movies until the hopeful-blockbusters are released many months into the future, which would further delay positive cash flow. This paragraph also mentions that losing all revenue for two or three months creates “a risk” of breaching loan covenants.
Final paragraph indicates there is “…a material uncertainty which may cast significant doubt about…” the organization’s “…ability to continue as a going concern.”
Another question to make your brain hurt: is a lease modification a separate contract or it is accounted for as a change in the existing contract?
- Variable Consideration Under FASB ASC-606, Revenue from Contracts with Customers
Under ASC-606 variable consideration is estimated and recognized during the life of the contract. Keep in mind the likelihood of reversal. My brain hurts even more.
- Risks and Uncertainty Disclosures
Uncertainties could be compounded. Ponder whether estimates might change materially in the near future.
- Hedging Relationships
- Financial Statements Prepared Under a Special Purpose Framework
- Auditor and Accountant Reporting – Emphasis of Matter
AU-C 706A paragraph .06 allows an auditor to add an emphasis-of-matter paragraph to call attention to something that is already disclosed if “..in the auditor’s professional judgment, it is of such importance that it is fundamental to users understanding of the financial statements.”
Report points to paragraph .A2 which indicates a major catastrophe having a significant effect on the organization is one situation when there might consideration of adding an EOM comment.
AR-C 90.89 and AR-C 90.A142 contain similar discussion for reviews.
Report points out AR-C 80 does not contain similar comments for compilations. If you are wise you’ll pay close attention to the comments in AR-C 90 for reviews as you prepare compilation reports.
Stay safe, wash your hands, and keep your distance.