Financial Reporting Considerations – Coronavirus

The effects of the coronavirus are evolving rapidly (hour-by-hour, day-by-day) and are unique for each entity's circumstances. The following is a high-level overview of a few matters related to financial reporting for consideration during this critical time.

Subsequent events

Financial statements need to reflect all material current and potential effects of the coronavirus that existed at the period end date. The significant downturn in economic conditions associated with the coronavirus is generally viewed as having started in the first quarter of 2020. For calendar-year-end entities that have yet to finalize their 2019 financial statements, consideration should be given to disclosure of subsequent events in accordance the Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) Topic 855, Subsequent Events.

Valuation and impairment

For 2020 financial statements, consideration should be given to how the coronavirus potentially affects many estimates and related disclosures, including, among others, those related to valuation and impairment. Asset impairment considerations (and the related professional guidance for reference) may include:

• Financing receivables (e.g., trade accounts receivables, loans)
  • FASB ASC 310, Receivables
  • FASB ASC 326, Financial Instruments — Credit Losses (if adopted)
• Inventories
  • FASB ASC 330, Inventory 
• Equity securities
  • FASB ASC 320, Investments: Debt and Equity Securities, or FASB ASC 321, Investments: Equity Securities, if ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, has been adopted
• Debt securities
  • FASB ASC 320 or FASB ASC 326, if ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, has been adopted
• Other investments
  • FASB ASC 325, Investments — Other
• Property, plant, and equipment
  • FASB ASC 360, Property, Plant, and Equipment
• Intangibles
  • FASB ASC 350, Intangibles—Goodwill and Other 
• Deferred tax assets
  • FASB ASC 740, Income Taxes

Debt agreements and covenants

Entities may need to amend terms of existing debt agreements or obtain waivers for debt covenants based on the impact of disruptions caused by coronavirus resulting in cash flow problems. Thus, debtors may need to determine whether changes to existing debt arrangements represent a modification or extinguishment subject to the accounting requirements of FASB ASC 470-50 or a troubled debt restructuring subject to the accounting requirements of FASB ASC 470-60. Similarly, creditors that are making modifications will need to give consideration to FASB ASC 310-40 in determining whether the modification is a troubled debt restructuring.  If there has been a covenant violation or other default at the balance sheet date, debtors also should consider whether the classification of long-term debt needs to be revised in accordance with FASB ASC 470-10-45.

Going concern, risks and uncertainties

If conditions or events related to the coronavirus raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued (or available to be issued), certain financial statement disclosures are required under FASB ASC 205-40.  Additionally, FASB ASC 275 requires disclosures about risks and uncertainties including certain changes in estimates and vulnerability to concentrations. In certain cases, the circumstances related to the impacts of coronavirus on the entity's operations, financial situation, or risks and uncertainties may warrant an emphasis-of-matter paragraph in the auditor's report. 

Conclusion

The discussion of accounting and financial reporting issues above is not intended to be all inclusive; rather, is intended to be indicative of the types of issues that may need to be addressed in preparing financial statements and considering the consequences of coronavirus on financial reporting. As always, Freed Maxick is available to answer your inquiries on this topic as well as most other accounting and assurance topics.