How the Accounting World is Impacted by COVID19
Updated: Oct 15, 2020
The Coronavirus (COVID-19) has taken the world by complete surprise. As the virus spreads globally, it affects communities, ecosystems, and financial markets. The focus of most businesses is now to protect employees, understand the risks to their businesses, and minimize disruptions caused by the efforts to contain the spread of the virus.
The impact on financial reporting may not be the first thing that comes to mind as a consequence of the outbreak, but there is an important and challenging role here for businesses when preparing financial statements. As events unfold, companies should consider the following as it relates to financial reporting.
Cash flows and liquidity. Economic activity is slowing as millions practice social distancing to stem the spread of COVID-19 (coronavirus). As a result, companies are either experiencing or anticipating significant constraints on cash and working capital, including potential liquidity challenges. Given the importance of cash flow in times like this, companies should immediately develop a treasury plan for cash management as part of their overall business risk and continuity plans. Awareness of cash reserves or shortages, along with the liquidity position, will be a starting point for identifying opportunities to protect and improve your position.
Debt modifications and loan covenants. Companies experiencing decreased revenues, higher operating costs and/or cash flow challenges due to COVID–19 may need to obtain additional or bridge financing, restructure existing debt agreements, or obtain waivers in debt covenants. These changes may represent a debt modification, debt extinguishment or a troubled debt restructuring, and all three have different accounting and reporting implications. If covenants are breached, the debt may need to be reclassified from long-term to current on the balance sheet.
Impairment of receivables, loans and investments. Given the volatility in financial markets, companies need to assess the value of investments for potential impairment, particularly debt or equity instruments from issuers affected by COVID-19 or its ancillary outcomes. In addition, and in accordance with the new accounting standard on credit losses, companies are required to consider the future impact of the pandemic when calculating the allowance for credit losses.
Impairment of goodwill and other long-lived assets. Macroeconomic conditions, such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets may indicate that a triggering event has occurred and therefore, an interim impairment test may be needed. Moreover, a significant drop in market prices considered to be sustained (other than temporary), adverse changes in the use or utility of certain assets or asset classes, or negative changes in the business climate can trigger the need to perform an impairment assessment of long-lived assets. Companies should consider the need to engage valuation experts to assist in evaluating potential impairment of goodwill or other assets and estimating the fair value measurements of financial assets.
We are living in unprecedented times on a global scale. Financial reporting can play an important part in the communication between companies and their stakeholders in this turbulent period. Companies will need to continue to evaluate how COVID-19 impacts their disclosures, including whether disclosures are required within the financial statements or other areas within the filing, including the description of business section, risk factors, or management’s discussion and analysis (MD&A).
Business owners are encouraged to maintain close communications with their accountants as the circumstances change. We are available to answer your questions, feel free to call us or send us a message.