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The coronavirus (COVID-19) pandemic has caused widespread global concern. But many are worried about the effect coronavirus will have on business and its financial statements for 2019 and beyond.
What should you consider with financial reporting?
The financial impact of the virus is widespread, and yet we still do not know the duration or full impact of the pandemic. When preparing financial statements, consider the shock this outbreak will have a material effect on your company’s:
- Supply chain, including potential effects on inventory and inventory valuation,
- Revenue recognition, in particular if your contracts include variable consideration,
- Fair value measurements in a time of high market volatility,
- Financial assets, potential impairments and hedging strategies,
- Measurement of goodwill and other intangible assets (including those held by subsidiaries) in areas affected severely by COVID-19,
- Measurement and funded status of pension and other postretirement plans,
- Tax strategies and consideration of valuation allowances on deferred tax assets, and
- Liquidity and cash flow risks.
It is also critical to monitor the credit standing of your customers. A decline in their credit standing may affect payment on the outstanding balance. This may also necessitate that you examine your allowance for bad debts.
Additionally, it may be necessary to report risks related to the COVID-19 critical audit matters (CAMs) in your report. If your company works with an audit committee, this is an excellent time to engage in critical dialog with them.
How should your company report the effects of the COVID-19 outbreak on its financial statements?
Under U.S. Generally Accepted Accounting Principles (GAAP), companies must differentiate between two types of subsequent events:
- Recognized subsequent events. These events provide additional explanations about unusual conditions that existed at the date of the balance sheet. These may include bankruptcy or pending litigations. The effects of these types of events need to be recorded on financial statements.
- Nonrecognized subsequent events. These events provide evidence about unexpected conditions that didn’t exist at the balance sheet. These conditions appeared after that date but before the financial statements are issued. Events, such as a natural disaster, should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should always include the nature of the event. An estimate of its economic effect should also be included (or an acknowledgment that such an assessment isn’t available).
The COVID-19 outbreak did not become a public health emergency until January 30, 2020. However, significant events that caused the outbreak occurred during 2019. Accordingly, businesses may need to recognize the effects of the coronavirus in their financial statements for 2019 and possibly, the first quarter of 2020.
There are many unknowns about the spread and severity of the COVID-19 pandemic. JLK Rosenberger can help navigate this potential crisis and evaluate its effects on your financial statements. Contact us for the latest developments. Please call us at 818-334-8624 or click here to contact us. We look forward to speaking with you soon.