Financial Reporting – The Impact of COVID-19

The coronavirus pandemic has impacted far more than just our health. While concerns over public health and stopping the spread of the virus continue, companies are facing additional challenges when it comes to their operations and financial reporting. From stopping or modifying operations quickly to adjusting to new logistic requirements or lessened customer demand, the impact of COVID-19 on businesses is wide spread.

As companies reflect on the first and second quarters of 2020 and continue reporting their financial statements, there are several important factors to keep in mind around accurate financial reporting. It is highly likely that the state of a business is much different now than was predicted by last year’s reports or forecasts. Adjusting controls and procedures is necessary to continue operations, but everything must be documented properly throughout the financial checkup process.

Asset Impairment: Find Business Disruptions – Whether your auditors are using email, video conferencing or phone calls to conduct their rounds, some parts of the process remain the same. The disruptions brought on by COVID-19 were swift and sweeping, but they may not last forever. It is important to classify disruptions as either short-term impacts or long-term impairments for the business.

Analyze all assets for impairment in the proper order, starting with accounts receivable and ending with goodwill assets. When it comes to your accounts receivable, inventory, and other assets, begin by considering how COVID-19 will impact your future forecast for economic conditions. The value of your inventory should also be considered, and it is important to note any reserves or surpluses of inventory due to lack of demand as well as costing methodologies.

If your company has incurred excess capacity costs, they should be included as expenses in whichever period they occurred. Do not allocate these costs as overhead. Changes in labor, material shortages, and partial or total shutdowns are all likely to play a part in these impacts.

Next, evaluate your indefinite-lived intangible assets, other than goodwill. From trade names to R&D work that is still in progress, your intangibles can be impacted by a variety of COVID-19 challenges. Consider changes to cost factors as well as any declines in cash flow or revenue. The conditions of your industry and market should also be considered, as well as changes to your capital access, exchange rates, or market developments that impact the fair value of these assets.

For long-lived assets, test for recoverability, including your property and equipment. COVID-19 may impact how an asset is used, and some circumstances may result in an asset with a carrying amount that is not recoverable. Document any continuing losses that may be incurred with the asset or how the asset is expected to be sold.

Finally, goodwill assets should be assessed last because they may impacted by the other assets listed above. Consider any changes to your personnel, business strategy, or customers. Due to the pandemic, it may be wise to conduct an interim assessment even if your annual impairment test is not yet due.

Employee Costs: Restructuring, Contracts, and Performance – Your employee costs are likely broad, with many moving pieces fitting together. As it relates to COVID-19, you should focus on the impacts to employee costs related to restructuring costs, contractual termination benefits, and performance metrics. These three categories will see the most change for many businesses.

When considering restructuring costs, factor in one-time benefits like severance. These costs occur only once a severance or benefit plan is approved by management and communication is sent to employees.

Contractual termination benefits may occur due to agreements with executive-level employees, laws for your country, or other factors. You should recognize these benefits only when it is likely that an employee will soon be entitled to them. At that time, you can make an estimate.

During COVID-19, businesses are experiencing great changes related to performance metrics. Your company’s performance metrics may align with cash bonus programs or compensation models based on equity. A revision for your expense recognition forecast may be necessary for cash bonuses. Also, the quantity of equity awards may need to be reevaluated.

Revenue Assumptions: Revenue Contracts with Variable Consideration – The estimates of your revenue contracts will likely need to be reassessed due to the impacts of COVID-19. At the inception of a contract, companies must estimate transaction price according to ASC 606. This estimate has to include variable considerations like rebates, volume discounts, royalties, etc.

Throughout the contract term, you have to update your variable consideration estimates. The updates should consider the existing conditions at the end of the reporting period. For COVID-19, these conditions may include diminished customer demand, disruptions to supply chains, and alterations to manufacturing or distribution operations. Many companies are offering concessions on price in an effort to increase demand. You should also consider how your customers’ ability to pay is impacted by COVID-19. A deterioration in this factor can greatly impact your revenue recognition and financial reporting.

Company Debt: Unexpected Changes in Cash Flow – COVID-19 and the ensuing lockdowns have brought on a lot of sudden changes for businesses. The unexpected nature of these changes can impact cash flow and the result of operations, which in turn may leave your businesses out of compliance with debt covenants. In some circumstances, you may need to classify your debt as current. A waiver may help for the current reporting period, but it is necessary to consider if you will still fail to be in compliance with the covenants after the waiver period.

Evaluate the Wellness of Your Financial Statements – If your business is facing changes and challenges related to COVID-19, trust the financial experts at K-38 Consulting to assist you. With an experienced team of financial professionals, we can help evaluate your financial statements and financial reporting, provide additional review services, and make modifications where needed. Best of all, you only pay for the services you need. You can receive top-notch financial services without damaging your bottom line. Make sure your business and financial statements are prepared to meet the impacts of COVID-19. Contact K-38 Consulting today for a free consultation.

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