While the full effects of the COVID pandemic are still unknown, its impact is still being felt globally, even in areas that are deep into reopening phases. Every business has been affected in some way, forcing continuous reworking of goals and budgets to address potential risks. Aside from impacting global financial markets, the pandemic brings with it accounting implications for many entities as well.
Accounting in many financial statement areas is being impacted. Some of these key impacts include:
- Production interruptions
- Supply chain disruptions
- Unavailable personnel
- Reductions in sales, earnings, or productivity
- Facility and store closures
- Business expansion delays
- Inability to raise financing
- Increased volatility in the value of financial instruments
It’s important for your organization to consider its own unique circumstances and risk exposure as you analyze how recent events may impact financial reporting and specifically how your financial reporting needs to convey the effects of COVID-19.
Prepare for Accounting Impacts
The list of accounting impacts varies depending on each organization’s specific facts and circumstances. Some of the accounting areas businesses will most likely find affected by the current pandemic include:
- Long-lived assets and goodwill: Financial performance—including estimates of future cash flows and earnings—may be significantly affected by impacts of recent and ongoing events, both directly and indirectly. You may need to re-forecast estimated cash flows to include these economic impacts.
- Impairment of financial assets: If you have loans, trade accounts receivables, and/or contract assets, you’ll need to evaluate the extent the pandemic has affected the collectability of your receivables and assets. Be sure to look at reasonable and supportable forecasts for future economic conditions as well when estimating expected credit losses. This may include unemployment trends, geographic impacts from COVID-19, supply chain interruptions, and more.
- Debt accounting: Carefully evaluate the accounting impact of covenant violations. You’ll need additional analysis on the accounting in order to restructure debt in uncertain economic times.
- Inventory: Since you’re required to record inventory at the lower of cost or net realizable value, you’ll need significant judgment to assess selling price as prices continually flux during the disruption.
- Leases: This is another area where your forecasts and assumptions will need significant judgment. Interest rates have significantly decreased, requiring companies to reassess incremental borrowing rates for new leases entered into since March.
- Revenue recognition: Reassess whether you or your customers will be able to hit performance targets that may have an impact on your recognition of revenue. ASC 606 requirements mean companies need to assess their customers’ ability to pay when a contract is created. Upon review, if you conclude collection is not probable, this will impact revenue recognition and/or accounts receivable reserves for bad debts.
The Added Challenge of Continued Remote Work
Adding to the challenges of these accounting impacts is the fact many organizations have been pivoted to working remotely since at least mid-March. Social interactions, processes, and work habits are vastly different when working remotely versus in the same office as the majority of your team.
Remote accounting—like accounting during “business as usual”—is about giving direction. Information is changing quickly, and it can feel difficult or even overwhelming to try to keep up with it all. Put your plan together around the new reality and understand that with policy changes proposed and implemented on a daily basis, your plan will likely continue to evolve and change. Even as various states and countries reopen for business, the pandemic’s impact on the global economy and financial markets will continue to evolve. Smart accounting teams will continue to evaluate accounting issues as circumstances and facts change.
Support Accounting Changes With ASI
Disclosing and recognizing the financial effects of COVID will likely require management to use significant judgment and work even more closely with internal finance and accounting teams as well as external accounting experts. Get started now by having the right business software in place to support rapid changes in accounting and policy.
For more than 30 years, ASI has been supporting businesses with accounting and ERP software to drive business improvement, performance, and profitability. Lean on our expertise to help your organization find the right technology solution for managing uncertain times and preparing for the future. Get your free software consultation today.