Beware: Coronavirus may affect financial reporting
The coronavirus (COVID-19) outbreak — officially a pandemic as of March 11 — has prompted global health concerns. But you also may be worried about how it will affect your business and its financial statements for 2019 and beyond.
Close up on financial reporting
The duration and full effects of the COVID-19 outbreak are yet unknown, but the financial impacts are already widespread. When preparing financial statements, consider whether 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.
Also monitor your customers’ credit standing. A decline may affect a customer’s ability to pay its outstanding balance, and, in turn, require you to reevaluate the adequacy of your allowance for bad debts.
Additionally, risks related to the COVID-19 may be reported as critical audit matters (CAMs) in the auditor’s report. If your company has an audit committee, this is an excellent time to engage in a dialog with them.
Disclosure requirements and best practices
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:
1. Recognized subsequent events. These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.
2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet. Rather, they arose after that date but before the financial statements are issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).
The World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until January 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the COVID-19 risk was present in China on December 31, 2019. Accordingly, calendar-year entities may need to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020.
There are many unknowns about the spread and severity of the COVID-19 outbreak. Contact us and our team at Darnall, Sikes, and Frederick CPAs can help navigate this potential crisis and evaluate its effects on your financial statements. Contact us for the latest developments.