COVID-19 is affecting all aspects of business operations. In addition to the disruptions in day to day activities, the circumstances, requirements and deadlines for financial reporting continue to evolve. Effective dates for implementation of many regulatory updates have been delayed and auditors’ ability to gather evidence and perform the fieldwork associated with issuing audit opinions is limited. Further, any area that includes expectations for the future, including, but not limited to, asset impairment, revenue recognition, contingent considerations and the value of various other assets and liabilities should be examined to consider whether adjustments or disclosures are needed.
Although there is an annual requirement to test for goodwill and other intangible asset impairment, one must also perform such evaluations when circumstances regarding the carrying value materially change. A likelihood that a carrying value is not recoverable triggers the obligation to perform an impairment test. An impairment test will consider expected future earnings for a reporting unit, with an appropriate discount rate to bring those future earnings to current value, for comparison with carrying value. If current value (aka fair market value) exceeds carrying value (aka book value), a goodwill impairment loss is recognized for the difference.
Revenue recognition, including estimates of credit losses on receivables should also be examined. For example, contract-based revenues with variable consideration such as price concessions, performance bonuses/penalties and rights of return/refund should consider whether any initial estimates should be updated for revised expectations.
Loss contingencies must be disclosed when there is a reasonable possibility that a loss has been incurred. If no liability is recognized, there should be disclosure of an estimate or range of possible loss, or a statement that no such estimate can be made.
While many companies might currently be distracted by operational needs, ignoring financial reporting requirements may cause additional problems, such as:
- Companies may be violating representations and warranties to others that the financial statements are prepared in accordance with Generally Accepted Accounting Principles (“GAAP”).
- Commercial loan agreements often include financial covenants based on GAAP financial statements. Once goodwill write-offs occur, loans may be in default. Proactively addressing this situation with the lender is almost always preferable to having the lender raise the issue.
- In the event that proper assessments are not made and subsequent problems occur, plaintiffs may claim that the accounting failure was so great as to indicate a purposeful hiding of the truth, or fraud. Executives and professionals involved with such financial statements could become personally exposed.