EDITORS' PICK | 13,086 views | Mar 23, 2020, 11:26am EDT

Jim DeLoach Contributor

CFO Network
I am a managing director with Protiviti, a global consulting firm.

It’s hard to point out anything that is not affected by the Coronavirus
Disease 2019 (COVID-19), other than, hopefully, the solace and
safety of our own homes. And if the virus hits any member of the
family, the home is affected, too. Which brings us to accounting and
reporting. Yes, these areas, too, are affected, as the financial markets
make clear almost daily with fluctuating valuations and
unprecedented volatility.
Impact of global epidemics on accounting and financial reports GETTY

To understand what the markets are telling us, we have to look at

what’s happening. In many jurisdictions and industries, operations
have been curtailed, supply chains have been disrupted, liquidity has
taken a hit, and travel and freedom of movement are severely
restricted. These developments not only separate many companies
from their customers, affecting demand in the process, but they also
erode customer purchasing power. These dynamics are prompting
companies in multiple industries to defer non-essential spending and
even make concessions to customers, borrowers and lessees to help
them through the crisis. As prospects for growth diminish, business
risk is created or exacerbated. As losses start to mount, financial risk
is added to the calculus.

That may not be the full picture, but it’s enough. How is this
manifested in accounting and the underlying financial statements? In
many ways. The impact by industry varies, of course, as every finance
function has to consider the unique aspects of the company’s
financial statements along with their ability to produce quality
financial reports with workforces that may be distributed and
disconnected due to health and safety considerations. In some cases,
the CFO has to get the job done with an empty building.

Due to the estimation processes inherent in financial reporting, the

current environment has forced finance functions to take a closer
look at impairment, valuation, net realizable value, loss contingency
and exposure considerations, to name just a few areas. To illustrate:

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• Impairment of goodwill — Does COVID-19 have
significant direct or indirect implications on expectations of
future cash flows that could reasonably be deemed sustainable
into the future? If so, these so-called “triggering events”
delineated under the accounting rules require a test of
impairment in goodwill.

• Impairment of long-lived assets — A significant drop in

market prices considered to be sustained (other than
temporary), adverse changes in the use or utility of certain
assets or asset classes, or negative changes in the business
climate can trigger the need to perform an impairment
assessment of long-lived assets.

• Inventories: net realizable value — Companies with

COVID-19-related revenue declines or disrupted supply chains
should evaluate whether they need to adjust the carrying value
of their inventory. Perishables, products with short shelf lives
or expiration dates, or specific seasonal inventories are at the
most risk of an impairment.

• Inventories: reduced manufacturing levels and

excess capacity costs — Unplanned work stoppages or
severe slowdowns due to labor or material shortages could
cause manufacturing levels to drop below standard levels. If
so, excess fixed overhead costs that cannot be allocated to
production due to underutilized capacity must be expensed in
the period they are incurred.
• Impairment of receivables, loans and investments —
Given the volatility in financial markets, companies need to
assess the value of investments for potential impairment,
particularly debt or equity instruments from issuers affected
by COVID-19 or its ancillary outcomes. The way this is done
varies for different types of instruments.

• Fair value measurement — The determination of fair value

in situations where it’s called for is much more complicated
when there is uncertainty and volatility in the markets.
Nonetheless, current market prices cannot be ignored in
valuation assessments.

• Debt modifications and loan covenants – Companies

experiencing decreased revenues, higher operating costs
and/or cash flow challenges due to COVID–19 may need to
obtain additional or bridge financing, restructure existing debt
agreements, or obtain waivers in debt covenants. These
changes may represent a debt modification, debt
extinguishment or a troubled debt restructuring, and all three
have different accounting and reporting implications. If
covenants are breached, the debt may need to be reclassified
from long-term to current on the balance sheet.

• Revenue recognition – In addition to the obvious impacts

of reduced revenue due to the impact of COVID-19, companies
also need to consider the initial and ongoing evaluation of
variable consideration inherent in customer contracts, such as
discounts, refunds, price concessions, performance bonuses
and penalties.
If these issues are not enough, companies must also consider
information that becomes available after the balance sheet date but
before the issuance of their financial statements. Companies are
required to disclose the nature of the event and either an estimate of
the financial statement impact or a declaration that an impact
assessment cannot be made. Accordingly, depending on the timing of
their issuance, the financial statements of calendar year reporting
companies may have included such disclosures. The financial
statements of non-calendar-year reporting companies may require
even more real-time consideration of such disclosures.

During 2020, CFOs should expect the impact of COVID-19 to affect

both accounting and disclosures in their quarterly and annual filings
with the U.S. Securities and Exchange Commission.

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Jim DeLoach

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I am a founding managing director with Protiviti, a global consulting firm. Prior
to that, I was a partner of long standing with Arthur Andersen. A lifelong Texan,
I have… Read More

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