Businesses throughout the world are witnessing financial disruptions due to coronavirus that are creating a major impact on their processes and operations. This is pretty much the time when entire businesses start working on their short-term or year-end financial statements.
There might be a lot of year-end enterprises that are aware of the impact that the pandemic has created on their financial positions and operations. But, there exists a high probability that most of them will not be aware of the exact impact the pandemic has created for them. Although a lot can be learned to establish some disclosure level necessary to let the material information reader know something that may have the potential to affect the financial statements against periods post the date of the balance sheet date.
This means if an enterprise is yet to issue its financial statement of December 31, 2019, there is a probability of a subsequent material event being recognized in relation to COVID-19. So, let us discover how all this affects financial reporting and auditing.
Coronavirus Effects on Financial Reporting
1. 2019 Calendar Year-End Reporting Enterprises:
The main impact drivers on domestic firms (as a result of the business/travel restrictions and plant closures) started in Jan 2020 for a majority of firms. In this scenario, for subsequent events, calendar year-end enterprises will mostly consider COVID-19 impacts.
Two Subsequent Event Types (Under U.S. GAAP):
- Recognized Subsequent Events – These refer to the transactions or events that provide added proof about situations that were there during the balance sheet date, including the natural estimates in the financial statements’ preparation process (usually known as Type I subsequent events).
- Non-Recognized Subsequent Events – These refer to the events that provide proof about situations that were not there during the balance sheet date but came into existence following that date (usually known as Type II subsequent events).
Going by the above timeline, a majority of the enterprises for the calendar year-end will most probably establish that the impact of coronavirus on accounting falls under the non-recognized subsequent event and the same would reflect in the financial statements against the Jan. 1, 2020 starting period.
2. Corona- The Audit Planning Meetings’ Highlight
The corona pandemic will be the highlight of the entire meetings of audit planning. As per Andrew Imdieke, an assistant professor working at the University of Notre Dame’s Mendoza College of Business, contingency plans are already being implemented by the accounting firms against the epidemic effects on their audits.
He further adds, “If you have a team of 10 people that are typically in the field for a particular client, you have to start thinking what if this all of a sudden spreads throughout an office or throughout a client, and you don’t have the people to do the work. That’s just within the firm — the resource constraints they might face in the planning process.”
The audit planning sessions will also take into account the client effects of the pandemic, not limited to key accounts and business operations but also on the availability of the staff for an auditor meet. There might be problems in this type of meeting due to travel restrictions.
3. Multiple Financial Statement Accounts
As per the PwC LLP website statement, revenue assertions comprising variable consideration and for different sums paid by customers may be impacted. Apart from this, a lot of other types of accounts are likely to witness a considerable change, including stock compensation, impairments to intangible assets and goodwill, etc. PwC is of the view that a few effects on the hedging of contracts against forecasted cash flow will be there, and it recommends recognizing depreciation expenses against idled facilities.
Concerning hedge accounting, PwC stated, “Any derivative gains or losses deferred in accumulated other comprehensive income (AOCI) prior to the change in likelihood will remain in AOCI until the forecasted transaction impacts earnings (or until the forecasted transaction becomes probable or not occurring). If a company determines that the hedged forecasted transaction is probable of not occurring by the end of the originally specified time period (or within an additional two-month window thereafter), amounts deferred in AOCI are required to be recognized in earnings immediately.”
4. Employees and Stakeholders
As per an advisory website statement of Deloitte Touche Tohmatsu Ltd., clients must do detailed operational examinations and ensure open communication lines with stakeholders, suppliers, and employees.
5. Assets’ Writing and Detailed Disclosures
One must get prepared to write down the assets and make disclosures in detail with respect to the effects of the pandemic.The decline of Wall Street into a bear market, along with the harsh disturbance that is coming into existence fast for many business operations, is definitely going to create a serious effect on March quarter results at many organizations!
The firms that think their activities are getting affected need to make impairments of the assets with in-depth disclosures in their financial statements concerning their lowered revenue and income forecasts.For year-end 2019 financial statements, the February statement of the SEC and PCAOB briefed the public enterprises and their auditors “to consider potential disclosure of subsequent events in the notes to the financial statements.”
Since there is a high possibility for the worsening of the financial fallout for the financial statements of the March quarter, firms are expected to make disclosures concerning the effects of the pandemic during the forthcoming reporting periods. As per Michael Stevenson, CPA, the national practice leader — Accounting & Reporting Advisory Services group for BDO USA LLP in Dallas, “Those impairments will come with a great deal of testing, a great deal of disclosure. But what that looks like at this point is probably unknown.”
Undoubtedly, the corona pandemic is going to create a massive impact on the financial auditing and reporting process. Enterprises need to carefully evaluate the financial performance of their business and include the effects of the pandemic on their finances in their reports. However, this is not the real challenge that business owners are facing; the biggest challenge for them presently is ensuring smooth business operations and cash flow.
Focusing on both these imperative aspects can become overwhelming for them. So, it is advised to seek third-party support when it comes to managing accounting and preparing financial reports in order to set yourself free to focus on core competencies. Are you looking for a reliable partner for financial reporting during the corona pandemic?
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