Public companies are dealing with a variety of financial reporting difficulties in the face of the unpredictable COVID-19 pandemic and the impact it’s having on businesses of all sizes.
Those include preparation of forward-looking cash-flow estimates, recoverability and impairment of assets, accounting for financial assets, and going concern analyses.The SEC has been granting companies and their accountants more time to deal with all the problems, especially as many accountants are forced to work remotely and are away from their colleagues.
“The SEC originally gave some deadline relief, but for a shorter scope, and then everyone was concerned because it didn’t scope in the March 31 period-ends,” said Mark Miskinis, senior partner of SEC reporting in Deloitte’s National Office Accounting and Reporting Services Group. “I think the SEC did the right thing and extended that. What it looks like the SEC is trying to do is balance the challenges that companies are facing in getting their reporting issued with the importance of getting timely, high-quality financial information out to investors. They’re encouraging registrants to report in a timely manner if they can, with expanded disclosures about all of the uncertainties that are out there and also providing this deadline relief in the background so that if the registrants can’t get there, they’re not going to feel pushed to get out information that is not as high quality as normal.”
The financial reporting delay has been useful for investors as well. “I actually think that the SEC has done a pretty good job of telling companies what investors want and with the delay they gave companies,” said Sandy Peters, head of global financial reporting policy at CFA Institute. “Then they came out with guidance on what people should disclose. That included some interesting non-GAAP stuff. We basically were asking for more forward-looking information, but they were actually including that request not just because investors need it, but because policymakers need it to make decisions about how to address issues. I would say that the SEC has done a pretty good job of at least signaling what people need.” 
Deloitte is spending more time discussing those changes with its clients and recently updated its report, Financial Reporting Considerations Related to COVID-19 and an Economic Downturn, to cover some of the changes related to the CARES Act stimulus package that Congress passed this month. The report discusses some of the main accounting and financial reporting considerations related to conditions under the coronavirus pandemic along with some industry-specific considerations.
Miskinis has been finding the SEC guidance helpful for companies to apply, especially on the disclosures in the Management Discussion and Analysis section of the financial reports. “When you look at the MDA, for example, there’s a requirement to disclose trends or uncertainties that are expected to have a material impact on the company going forward,” he said. “The requirement itself is nothing new, but the level of uncertainty for certain industries is pretty unprecedented in the current environment, and it makes those disclosures extremely challenging. That’s what registrants are trying to deal with as they disclose in their MDA what the impact is and what it might be in the future, potential liquidity issues, going concern and a whole host of issues like that.”
The going concern determination is a big worry right now for many companies that are facing huge challenges during this pandemic. With so much of the economy and supply chain shut down, it’s hard to know if they can continue operating in this environment.
“This is an area where companies are going to need to be more concerned about trying to get the information they need to perform a going concern analysis, which is always required,” said Dennis Howell, senior consultation partner in Deloitte’s National Office Accounting and Reporting Services Group. “When you think about the key inputs that go into a going concern analysis, it’s really forward-looking information. You’re really looking out 12 months from the date you issue your financial statements. It’s been well publicized about the challenges companies are going to have in developing that forward-looking information. There are a lot of concerns around companies that are shut down currently. It’s unprecedented, with companies having to be in a situation where they haven’t operated for some time now, and they don’t know when they’ll be able to go back into operation. With the various shelter-in-place orders that companies are facing, there are a lot of variables that go into developing estimates. Estimates are generally challenging to begin with under normal circumstances for many companies, and when you factor in these somewhat unprecedented situations like business closings, shelter-in-place orders and travel restrictions, and just not knowing when these types of restrictions will be lifted and companies will be able to get back to normal, it’s really putting tension in companies’ estimates of their forecasts. Those forecasts will be used when companies do their going concern analysis. I think that’s the struggle right now.The forward-looking information just isn’t something that has to do with going concern. It’s also the various impairment tests that companies will most likely be performing for this current quarter, whether it’s impairment of fixed assets or intangibles, and looking at income taxes. The same information will go into a host of different analyses. The going concern is one that’s getting a lot of attention, in addition to some of the other things that you would historically think about, such as impairment.”
“Just the uncertainty around it makes it difficult for companies to understand the challenges,” said Nate Vander Hamm, a shareholder at Mayer Hoffman McCann P.C., another Top 100 Firm. “How do they estimate how long they’ll be feeling the impacts, and what the recovery will be after the stay-at-home orders start to end? What’s the recovery going to look like? What’s it going to mean to them from a cost standpoint and from a customer standpoint? Are they going to be operating at full capacity fairly quickly? How are they going to navigate the next 12 months? That’s a real challenge for companies, just thinking about going concern. I think that companies that are in a very strong financial position are set up well to have the best argument for how they’re going to weather the storm, although people that are highly leveraged and that may have been having financial problems before, the stress test of something like this is probably going to be very difficult for them.”
Companies are also concerned about their insurance coverage and whether they can recoup some of the money lost due to the pandemic. “Insurance recoveries will be something that will be top of mind for a long time,” said Howell. “There are a lot of companies that are experiencing losses during the shutdown, and for some of these losses, the insurance will vary. What is fairly common is that companies maintain what’s called business interruption coverage. Business interruption insurance is designed in large part to cover for lost profits during a shutdown period. Companies need to think about whether the events that we’re facing now would be considered a covered event. In other words, would losses from a pandemic be covered? That’s one of the things companies should focus on when they’re thinking about applying for coverage and certainly before any accounting recognition is provided. They would need to ensure that the losses they’re incurring are covered, and if they are covered, they would need to evaluate the financial wherewithal of the insurance company. Sometimes the claims can get a little bit complex to the extent that you have multiple layers of insurance or from different carriers. Companies would need to think through that.”
Contract modifications should also be looked into, as many companies won’t be able to fulfill their contracts in the current environment, so they may need to change the dates and terms. They may face penalties under the terms of a contract if they’re not able to fulfill them.
“Let’s say you have a revenue contract, for example, and there may be a ‘liquidated damage provision’ or ‘failure to supply provision’ if you can’t perform on time,” said Howell. “Companies need to be mindful that those types of provisions, if they have been triggered, would require recognition as a liability. If it’s clear that you’ve triggered that provision of the contract, that would not be viewed as a loss contingency that a probability of settlement would come into the equation as to whether you record it or not. It’s clear that if you triggered the provision, you would need to record it as a liability. And then you would need to follow the accounting guidance that tells you when you would release that liability, which is when you extinguish or legally release it. We think companies potentially may be tripping up on some of these provisions more now because of their supply chain disruptions, and ability to have access to materials they need to provide service under contracts. There will certainly be disruptions to companies’ operations to fulfill these arrangements.”
The CARES Act includes some provisions that companies will also need to be mindful of, especially if they’ve accepted government assistance, as there are various restrictions on dividends and share buybacks.
“Companies will need to go through the provisions,” Howell suggested, “There may be certain provisions they qualify for assistance from the government, and they need to evaluate what accounting policies should apply to the provisions. Some companies may already have accounting policies for government assistance. U.S. GAAP does not provide accounting guidance for government assistance to a business institution. That has been an area of diversity for 30 years with respect to how companies account for government assistance to a business entity. If you have an existing accounting policy, you generally would need to apply it if it’s applicable for whatever you’re trying to apply for now under the CARES Act, but if you don’t have a policy, there may be more judgment involved as to the selection.”
Accounting for loans to businesses under the recently refinanced Paycheck Protection Program could also prove to be challenging. “There’s just the general lack of specific, on-point U.S. GAAP guidance for government grants and forgivable loans,” said Vander Hamm of Mayer Hoffman McCann. “A lot of companies will analogize to [International Financial Reporting Standards]. Other companies will treat them like debt. There’s not a clear U.S. GAAP standard that would say how you have to do it. Under IFRS, it’s very clear. There’s a specific standard for it. Essentially you wind up identifying the nature of the grant as either asset based or income based. This would be an income-based grant. The PPP loan would fall under that category, and then it’s realized based upon a reasonable assurance standard, which doesn’t exist under U.S. GAAP. A portion would be forgiven and a portion would be repaid. You look at what portion you are reasonably assured would be forgiven and then that portion is treated like a grant, and recognized as the grant was earned, while the portion that will be repaid just gets handled like debt. There is a history of U.S. companies analogizing to IFRS if there’s a lack of clear U.S. GAAP guidance.”
Other lending arrangements under the CARES Act, such as the lending program for airlines, will need to be treated differently. “There are some aspects of that act related to lending programs that are being facilitated by either the U.S. Treasury or the Federal Reserve that do place certain limitations on a number of items, one of which is the ability to make buybacks over a particular period,” said Ashley Carpenter, a partner in Deloitte’s National Office Accounting and Reporting Services Group. “For some of the lending arrangements to the airlines, it’s applicable to those arrangements. There are certain lending arrangements in there that it doesn’t apply to and some that it does.”
Quarterly reports will be especially affected by the crisis. “When we crossed 3/31, you’ve got the quarter end of many companies, and a lot of these companies are going through the close process,” said Miskinis. “For the first time, the majority if not all of their employees are on a remote basis, and they’re trying to ensure all of their internal controls are functioning appropriately in that environment, and at the same time they’re dealing with all of the challenges in coming up with all of these estimates and assumptions that are needed to get their books closed. And assumptions have such a wider range of reasonably possible outcomes than you would normally experience. In addition, when you get all that done, you still have to step back and say what are my disclosures? How much additional disclosure do I have to put in my filings to help investors understand what those assumptions were, and the possible impact that changes in the estimates could do in the future? When you put all of that together, there’s a lot going on and a lot of challenges for the folks on the financial reporting side.”
The next quarterly report will provide even more telling information about the impact of the pandemic on corporations. “Here’s the thing: The first quarter only has a couple of bad weeks for most U.S.-only companies,” said Peters of CFA Institute. “It’s been working its way across the globe. It’s mostly two good months and one maybe not so good month, but people are really more interested not in the earnings release that’s happening now, but in what that portends for the future as a point of communication that they can have with the company. I think the real issue is the consistency of assumptions and estimates and what the company’s assumptions are about what’s the depth and severity of the pandemic, and how they’ve incorporated it in all of their assumptions as they look at impairments, goodwill, triggering events and the evaluation of all assets. I actually think that what will be more interesting is the 10-K than the earnings release right now. The 10-Q’s will need to be updated as if they’re the 10-K in my view because you’re going to have to go through everything and say what happened to your business drivers and what your cash position is. You’re going to be able to see what revenue is variable, what revenue is fixed, and the same with expenses like we’ve never seen before. Every company is going to be different.”