Financial Statement

Issues and COVID-19

Financial Statement Issues and COVID-19The economic fallout from the COVID-19 crisis has emphasized the current and future need for timely and high-quality financial reporting by all companies.  On April 8, 2020, the SEC Chairman and the SEC Division of Corporation Finance Director released a joint statement which included the following summarizing statement:

“Company disclosures should reflect [the] state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its customers and its workforce is progressing, and (3) how its operations and financial condition may change as all of our efforts to fight COVID-19 progress.”

The joint statement reiterated the importance of forward-looking financial statements.  The pandemic and economic downturn have created complex circumstances for those preparing forward-looking statements.  Three of the biggest issues facing those preparing the statements:

Preparing estimates

This includes the impairment of non-financial assets, the realizability of deferred tax assets and ability to continue as a going concern.  There is a high degree of uncertainty about the outcome of the pandemic.  The economic conclusion of the pandemic is highly dependent on several hard to predict variables.  Some of these variables include: local and state government restrictions on personal and business activities, the degree of success in slowing the spread of the virus in an area, which is dependent on local community members, and the nature and effectiveness of government assistance.  Financial statement preparation requires the assessment of each of these variables to make good-faith estimates and prepare necessary documentation to support the estimates and any change to the estimates going forward.

Subsequent events

With the often daily volatile changes in the economic marketplace, it will be a challenge for preparers to assess recognized and unrecognized subsequent events.  Using the facts on hand, an assessment must be made of the existing conditions as of the balance sheet date.  For those with the balance sheet dates prior to March 2020, the events related to COVID-19 would be an unrecognized event, whereas those balance sheets dated March 2020 and after would likely need to recognize subsequent events in the financial statements, dependent on the severity of the negative impact on the company’s financials.

Going concern

Entities will need to assess their specific circumstances as to if they will have the ability to continue as a going concern within one year after the interim or annual financial statements are issued.  Some of the factors that will need to be considered include: (1) extent of operational disruption; (2) potential diminished demand for products or services; (3) contractual obligations due or anticipated; (4) potential liquidity and working capital shortfalls; and (5) access to existing sources of capital, such as a line of credit.  Management may have plans to mitigate the going concern issues and alleviate the substantial doubt of future operations within the next year, however comprehensive disclosures surrounding events and conditions will be necessary for the financial statements even if management’s plan is to alleviate this doubt.