Many businesses and not-for-profit organizations are still experiencing the adverse effects of the COVID-19 pandemic, but different organizations are affected differently depending on their geographic location and the nature of their operations.
If your organization only prepares its financial statements at the end of the year, you may not have considered how to factor the effects of the pandemic into your financial statements this year in compliance with U.S. Generally Accepted Accounting Principles.
However, as we approach the audit season for 2021, it’s a good time to make an analysis of whether your financial situation has improved or worsened this year.
Here are 10 areas to focus on as you consider your financial statements:
1. Revenue recognition
Make an assessment of how changes in customer preferences, credit policies or payment terms, discounts, refund concessions, and contract modifications have affected the top line of your income statement. You should also consider any impacts on the collectability of accounts receivable.
2. Fair values and estimates
Typically, these items are based on budgeting and forecasting of revenue, costs, and cash flows, but uncertainty during the COVID pandemic may have decreased the fair values of certain balance sheet items and increased the discount rates used in making estimates.
3. Investments
The fair values of investments and financial instruments that qualify for hedge accounting may have been negatively impacted by market changes due to the pandemic.
4. Government grants
These items may be accounted for as revenue or as donor-restricted contributions. You may also need to address documentation, eligibility, expense tracking, and other requirements such as government audits, depending on the specific requirements of government funding programs.
5. Property, plant, and equipment.
If the pandemic has led to changes in business plans, consider if there have been any changes in useful lives and related deprecation as a result. Long-lived assets and leased assets may also be subject to potential impairment.
6. Inventory
The value of raw materials, work-in-progress, and finished goods inventory may have been affected by certain market conditions, such as inflation, supply chain disruptions, and reductions in production. Write-offs may also be needed due to obsolescence.
In addition, year-end physical inventory counts may be delayed, restricted, or prevented due to travel and work restrictions. If your external auditors need to observe counts remotely, additional testing procedures during audit fieldwork may be required.
7. Deferred tax assets
Consider the effects of current-year losses and future uncertainty, including the impact of possible federal tax law changes, on the realizability of these assets.
8. Accrued liabilities
Additional liabilities may need to be booked this year for employee terminations, payroll tax payment deferrals, and changes in benefits. In addition, existing contingency accruals may no longer be adequate.
9. Long-term debt
Financial difficulties may result in debt modification or extinguishment. If your organization fails to meet its debt covenants, you may also have debt classification issues for existing loans. You should also consider the Paycheck Protection Program’s compliance requirements for loans and the probability of forgiveness.
10. Goodwill and other intangible assets
These items may require impairment testing or write-offs due to COVID-19 triggering events.
Contact us for assistance
This list should serve as a useful starting point for considering how the pandemic may affect your financial reporting. If you have questions about how the pandemic has affected financial results in 2021 and how to report these effects, contact us for guidance.