This article aims to provide a list of considerations for your financial statements and reporting requirements. Here we summarize some of the issues our clients are facing, and provide links to additional resources and more in-depth discussions on this topic.
Please check this page regularly as we will be updating it with new information as it becomes available.
Subsequent Events (FASB ASC 855)
Because the Coronavirus did not economically impact the U.S. until the first quarter of 2020, for those 12/31/2019 year-end reporting periods a non-recognized subsequent event disclosure might be more applicable to most companies. Because it is not a recognized event as of the balance sheet date, it doesn’t have to be represented on the face of the financials, rather a disclosure in the footnotes describing events such as, but not limited to:
- Reduced revenue & cash flows;
- Business/customer disruptions;
- Supply disruptions;
- Production delays;
- Customer dissatisfaction;
- Employee claims;
- Breach of contract lawsuits.
The impact of COVID-19 may affect your accounting estimates. Estimates that are measured as of the balance sheet date for the period after that date could impact your reported amounts. Some considerations include:
- Allowance for doubtful accounts (are your customers going to pay you timely after year-end);
- Impairments of Property, Plant, and Equipment;
- Impairment of intangibles;
- Revenue recognition from contracts with customers;
- Lease modifications;
- Deferred income taxes;
- Loss contingencies;
- Financial asset market decline;
- Debt securities;
- Inventory allowances: recognize losses when the net realizable value is less than cost (ASC 330-10-35).
Consideration of Going Concern
Generally Accepted Accounting Principles requires management to assess the risk of a substantial doubt about the entity’s ability to continue as a going concern for a period of one year after the issuance of their financial statements or are available to be issued. When the aggregate of conditions and events indicate that it is probable that the entity will be unable to meet their obligations when due within one year from the date that the financial statements are issued, a disclosure to that effect is needed in the footnotes.
Debt agreements and covenants
If the impact of the coronavirus causes disruptions that result in cash flow problems, entities may need to amend terms of existing debt agreements or obtain waivers for debt covenants. Thus, debtors may need to determine whether changes to existing debt arrangements represent a modification or extinguishment subject to the accounting requirements of ASC 470-50 or a troubled debt restructuring subject to the accounting requirements of ASC 470-60. Similarly, creditors that are making modifications will need to give consideration to 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 ASC 470-10-45.
On March 22, 2020, the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), and the State Banking Regulators (collectively “the agencies”) announced that they are working with banks who have borrowers affected by COVID-19. The agencies will not criticize institutions for working with borrowers and will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as troubled debt restructurings (TDRs). Modifications of loan terms do not automatically result in TDRs. According to U.S. GAAP, a restructuring of a debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. Working with borrowers that are current on existing loans, either individually or as part of a program for creditworthy borrowers who are experiencing short-term financial or operational problems as a result of COVID-19, generally would not be considered TDRs. This will be a case-by-case basis, so consult with your banks on how they are handling any outstanding debt you have with them.
Modification of the terms of leases due to COVID-19 (outside of renewals and extensions) the entity needs to evaluate the modification to determine if the substitution would result in a different classification at the inception of the lease, and whether it will be accounted for as a separate contract or as a change to the existing contract.
FASB provides a Q&A to help explain pandemic-related questions about lease accounting since many lessors will provide lease concessions to tenants. Some of the issues discussed are:
- Does the entity need to evaluate every contract to determine whether enforceable rights and obligations for concessions exist in the contract;
- Can an entity elect to apply the lease modification guidance in FASB Accounting Standards Codification Topics 840 and 842 to those contracts;
- Whether an entity should provide disclosures relating to lease concessions made because of COVID-19.
Deferral of Implementation of the new Lease Standard (Topic 842) and Revenue Recognition Standard (Topic 606)
The Financial Accounting Standards Board (FASB) has proposed a deferral of the effective dates of the new Lease standards and the new Revenue from Contracts with Customers standards.
If passed, private companies and private not-for-profit organizations would have the option to apply the new leases standard for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. Public not-for-profit organizations that have not yet issued financial statements would have the option to apply the standard for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
The proposed effective date deferral for revenue recognition would be limited to private company franchisors. Those stakeholders would have the option to apply the new standard for annual reporting periods beginning after December 15, 2019, and interim reporting periods within annual reporting periods beginning after December 15, 2020.
For more details, you can read the Exposure Draft here: https://accountingfoundation.us3.list-manage.com/track/click?u=e043e1190253df702a1340ed7&id=027703f99b&e=b705d2fc60
For more in-depth discussions on the various topics presented in this article, please visit the following links: