The impact of COVID-19 on the global and financial markets is expected to continue to evolve. Both business and consumer activity have altered, which certainly impacts financial statements. Businesses are chasing high-quality financial information more than ever just to survive. But the accounting implications will be widespread, and likely felt beyond just 2020.
Accounting in many financial statement areas is being impacted. Some of these key impacts include:
- Production interruptions
- Supply chain disruptions
- Unavailable personnel
- Reductions in sales, earnings, or productivity
- Facility and store closures
- Business expansion delays
- Inability to raise financing
- Increased volatility in the value of financial instruments
It’s important for each organization to consider their own unique circumstances and risk exposure as they analyze how recent events may impact financial reporting, specifically how their financial reporting needs to convey the effects of COVID-19.
Accounting Issues to Consider
The list of accounting impacts varies depending on each organization’s specific facts and circumstances. But here are some of the accounting areas businesses will most likely find affected by the current pandemic.
- Long-lived assets and goodwill: Financial performance—including estimates of future cash flows and earnings—may be significantly affected by impacts of recent and ongoing events, both directly and indirectly. You may need to re-forecast estimated cash flows to include these economic impacts.
- Impairment of financial assets: If you have loans, trade accounts receivables, and/or contract assets, you’ll need to evaluate the extent the pandemic has affected the collectability of your receivables and assets. Be sure to evaluate reasonable and supportable forecasts for future economic conditions as well when estimating expected credit losses. This may include unemployment trends, geographic impacts from COVID-19, supply chain interruptions, and more. If your business has available for sale investment securities, evaluate the probability of credit loss for impaired securities, and decide if you’ll have the ability to hold the security until the market recovers or if you’ll need to sell for liquidity.
- Debt accounting: Carefully evaluate the accounting impact of covenant violations. You’ll need additional analysis on the accounting in order to restructure debt in uncertain economic times.
- Inventory: Since you’re required to record inventory at the lower of cost or net realizable value, you’ll need significant judgment to assess selling price as prices continually flux during the disruption.
- Leases: Are your right-of-use assets on the balance sheet impaired? This is another area where your forecasts and assumptions will need significant judgment. Interest rates have significantly decreased, requiring companies to reassess incremental borrowing rates for new leases entered into since March.
- Revenue recognition: Reassess whether you or your customers will be able to hit performance targets that may have an impact on your recognition of revenue. ASC 606 requirements mean companies need to assess their customers’ ability to pay when a contract is created. Upon review, if you conclude collection is not probable, this will impact revenue recognition and/or accounts receivable reserves for bad debts.
Do This All Remotely
Adding to the challenges of these accounting impacts is the fact many organizations have been pivoted to working remotely since at least mid-March. Social interactions, processes, and work habits are vastly different when working remotely versus in the same office as the majority of your team. The rapid shift to a remote workforce may also strain your ICFR (Internal Control Over Financial Reporting), opening up access to new cybersecurity threats and vulnerabilities. Your technology will also need careful assessment to uncover potential loss of control in this area.
Remote accounting—like accounting during “business as usual”—is about giving direction. Information is changing quickly, and it can feel difficult or even overwhelming to try to keep up with it all. Put your plan together around the new reality and understand that with policy changes proposed and implemented on a daily basis, your plan will likely continue to evolve and change. Even as various states and countries reopen for business, the impact of COVID-19 on the global economy and financial markets will continue to evolve. Smart accounting teams will continue to evaluate accounting issues as circumstances and facts change.
Having the right business software in place can make it easier to pivot with changes in accounting and policy. PositiveVision has been providing software services to small to mid-sized businesses to improve the performance of organizations through resources, expertise, and exceptional ERP accounting software knowledge and support for nearly 20 years. Our team of specialists is committed to getting your organization where it needs to be with business management software so you can navigate uncertain times and prepare for whatever the future brings.
Ready to see how your business management software can better guide you through these uncertain times? Talk to one of our consultants now.