COVID-19 Accounting Considerations

The coronavirus (COVID-19) continues to impact the results of companies’ operations in different ways. The extent of the impact varies based on facts and circumstances, including a company’s geography, industry, diversification of products and services, supply chain requirements and workforce needs. All of these matters could have accounting and financial reporting implications for businesses.

Although the duration of the outbreak remains uncertain, companies should have a conversation now with their professional services provider to better understand the accounting and financial reporting challenges and impacts on existing business processes. If you have not had those conversations yet, consider these topics.

Inventory

Entities may be experiencing (or have experienced) declines in sales, significant disruptions to the supply chain and work stoppages. If this happens, consider the effects on the entity’s inventory costing. For example, a portion of fixed production overhead may need to be expensed versus capitalized under production at a “normal capacity” level. In addition, reevaluate inventory for obsolescence. This may be particularly relevant for entities with perishable or otherwise short, shelf-life inventory. Finally, due to COVID-19, the frequency and process for counting of inventories may have changed. For instance, an entity may have had a cycle count process in place that may not have been followed. Since this can result in the cycle count system being less reliable, this may require a need for a full “wall to wall” physical count at or near year-end.

Goodwill and intangibles

Depending on the significance and duration of the disruption from COVID-19, impairments may occur, even if goodwill and intangibles are amortized. Consider whether a triggering event has occurred, as well as the implications on the entity’s existing annual impairment assessment. As a reminder, an entity may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative assessment. The quantitative assessment involves comparing the fair value to the carrying value. Impairment analyses this year will likely be more time-consuming and require additional scrutiny. These analyses can be costly and take an extended period to complete, as well as involve assistance from external and internal specialists.

Debt and loan covenants

Entities may have obtained additional financing, amended terms of existing debt agreements or violated a restrictive covenant (consider both interim and annual) as a result of COVID-19. The implications of each such matter could be significant and complex. For example, there are different considerations for a debt modification versus a troubled debt restructuring, or potentially a debt extinguishment. Debt covenant violations and related waivers may take an extended period to resolve as banks are experiencing a significant backlog in requests and may need more time to evaluate the financial condition of the entity. If the entity is not able to address such violations timely this could lead to delays in the issuance of the financial statements, reclassification of debt for financial reporting and going concern issues.

Exit, disposal and restructuring activities

As a result of COVID-19, an entity may experience a prolonged business interruption, may decide to sell or abandon certain assets, execute a restructuring plan or take measures to reduce their operating costs through temporary employee furloughs, permanent reductions in workforces or modifications to employee compensation and benefit arrangements. Costs associated with these activities may include involuntary employee termination benefits, costs to terminate a lease or contract, and other associated costs, including costs to consolidate or close facilities and relocate employees. In addition, depending on the facts and circumstances of the activities being implemented, management should consider the reporting requirements related to discontinued operations. The implications of each of these matters could be significant and complex as there are multiple accounting standards involved.

Going concern evaluation

If the impact to operations from COVID-19 is significant, an increase in the uncertainty of an entity’s ability to continue as a going concern may exist. For many entities, this may be the first time that such an analysis has been necessary. Often, this will require management to prepare cash flow projections to support the going concern evaluation.

Internal control considerations

Due to COVID-19, physical work environments have changed. Management should consider controls during the reporting period, including: (1) before COVID-19, (2) during the “shutdown,” and (3) after the “shutdown.” Enhance your internal controls processes and procedures by automating existing controls and improving upon process documentation to assist with workforce turnover or remote working environments. 

For more information on accounting considerations, contact David Weber at david.weber@CLAconnect.com or 515-346-3694.

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, investment or tax advice or opinion provided by CliftonLarsonAllen LLP (CliftonLarsonAllen) to the reader. For more information, visit CLAconnect.com.

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