Impact on Financial Reporting
Operations for some organizations will be negatively impacted by the COVID-19 situation. Companies should onside the additional risks involved and the impact on the company. In some cases, the impact may necessitate adjustments to accurately reflect the financial situation of the organization.
On Feb. 19, 2020, the SEC and the Public Company Accounting Oversight Board (PCAOB) issued a joint statement regarding certain matters, including financial reporting considerations related to COVID-19. The statement was intended to remind issuers of its policy to grant relief from filing deadlines in certain situations, including audit firm access to information and company personnel. They also emphasized the need for issuers to consider relevant financial statement disclosures related to the potential effects of COVID-19, including the impact of subsequent events to the organization.
- Evaluate potential disclosure of subsequent events in the notes to the financial statements, as well as how the organization plans to respond to the events as they unfold, which can be material to an investment decision.
- Due to COVID-19, the SEC has granted relief related to financial reporting and has established a protocol. Contact the SEC staff regarding guidance.
- Reassess the reasonableness of allowance and/or reserve balances, as these may be impacted. For instance, the company could have large accounts receivable amounts from a certain customer who may have incurred severe impact on their business due to COVID-19, causing an inability to pay and thus necessitating an increase in the allowance for doubtful accounts.
- Examine all actions taken by the organization in response to COVID-19. Consider the impact to the financial statement, and ensure appropriate entries are recorded in the general ledger to accurately capture the impact.
- Assess derivatives and hedging – forecasted purchases and sales and hedging of these activities may be impacted. These factors should be taken into consideration in the valuation of the contracts and may cause problems from a hedge accounting standpoint as forecasted transactions are no longer probable of occurring. There may be legal questions on whether force majeure clauses are tripped.
- Public companies should consider whether updates are needed to Risk Factors, MD&A (known trends and uncertainties, potential impacts to guidance, capital expenditures, collectability issues, any impacts to cash flows, etc.), and other parts of filings.