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Coronavirus/COVID-19… impacts accounting, auditing and financial reporting.

Andy Mintzer, CPA

The Coronavirus pandemic has caused considerable damage to the health and security of people all over the world. The substantial harm of the pandemic is yet to be measured. But while worldwide efforts to stem the growth of the virus continue there are still required financial reports that must be issued within deadlines.

This posting discusses some of resources and relief available to accountants, financial statement preparers and auditors as a result of the COVID-19 pandemic. I will also discuss some accounting and auditing-related issues that have been raised. Keep in mind, of course, that this situation is evolving, and the information is subject to change or extension. This posting includes sections on:

Public Companies – and guidance issued by the SEC and SEC staff
Audits of financial statements – and the resources made available by the AICPA
Going Concern Considerations – an update to my posting in 2019 on this topic

Public Companies – SEC offers both guidance and potential to extend deadlines for required financial reporting.

Annual Form 10-K filing deadlines pushed back to provide relief for companies and auditors in completing calendar 2019 annual reports.

Worldwide securities markets saw significant drops in late February which caused significant uncertainty and constrained the resources of those with upcoming filing deadlines. The first major deadline for the annual Form 10-K for was for Large Accelerated Filer (companies with a public float of more than $700 million) – and it was March 2, 2020. The Securities and Exchange Commission (SEC) provided financial reporting relief on March 4, 2020 which generally pushed back the deadlines for all filers for 45 days; thus any filer who did not file its form timely had an additional 45 days (or until April 16, 2020) to timely file its Form 10-K. Here is what happened to the rest of the 10-K deadlines:

Filer Category	Original Form 10-K Deadline	Revised deadline with SEC relief

Accelerated Filer	March 16, 2020	April 30, 2020
Non-Accelerated Filer and others	March 30, 2020	May 14, 2020

Summarized potential impact of SEC deadline relief

This relief is not automatic and without conditions. Among other conditions, companies must convey through a current report a summary of why the relief is needed in their particular circumstances. The On March 25, 2020 the Commission issued an order that, subject to certain conditions, provides public companies with a 45-day extension to file certain disclosure reports that would otherwise have been due between March 1 and July 1, 2020. The SEC encourages companies and their representatives to contact SEC staff with questions or matters of particular concern in this regard.

In providing this deadline extension, SEC Chairman Clayton said:

“How companies plan and respond to the events as they unfold can be material to an investment decision, and I urge companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements.”

Companies should consider the need for COVID-19-related disclosures.

On March 25 the Division of Corporation Finance (Division) published disclosure guidance related to Coronavirus/COVID-19 consequences affecting SEC registrants while recognizing that the impact on companies is evolving rapidly and its future effects are uncertain (March 25 SEC Release). The Division is monitoring how companies are reporting the effects and risks of COVID-19.

In the March 25 SEC Release the Division encouraged timely reporting while recognizing that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. Although the Division acknowledged that the actual impact depends on many factors that are beyond a company’s control and knowledge, the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties can be material to investment and voting decisions.

SEC disclosure requirements apply to a broad range of evolving business risks even in the absence of a specific line item requirement that names the particular risk presented; for example, the SEC has highlighted that although no existing disclosure requirement specifically refers to cybersecurity risks and cyber incidents, a number of requirements may impose an obligation on companies to disclose such risks and incidents (See Release No. 33-10459 (Feb. 26, 2018))

In addition, a number of long-standing existing accounting related rules or regulations require disclosure about the known or reasonably likely effects of and the types of risks presented by COVID-19. As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in one or more of the following portions of a Form 10-K:

Management’s discussion and analysis,
Business section,
Risk factors,
Legal proceedings,
Disclosure controls and procedures,
Internal control over financial reporting
Financial statements

Assessing and Disclosing the evolving impact

The March 25 SEC Release also provides guidance to companies as they assess the evolving effects of COVID-19 and related risks will be a facts and circumstances analysis – not a boilerplate one-size-fits-all disclosure.

Disclosure about these risks and effects, including how the company and management are responding to them, should be specific to each company. As companies assess COVID-19-related effects and consider their disclosure obligations, the SEC has provided questions to consider, including:

How has COVID-19 impacted financial condition and results of operations? What are expected impacts to future operating results and near-and-long-term financial condition? Is the expected impact to future operations different than how it affected the current period?
How has COVID-19 impacted capital and financial resources, including the overall liquidity position and outlook?
Is there a material uncertainty about the ongoing ability to meet the covenants of credit agreements?
If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take? (Consider the requirement to disclose known trends and uncertainties)
Does the company expect to disclose or incur any material COVID-19-related contingencies?
Will COVID-19 issues affect assets or the company’s ability to timely account for those assets? (For example, will there be significant changes in judgments in determining the fair-value of assets)
Are material impairments anticipated (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities)?
Are increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on the financial statements anticipated?
Have COVID-19-related circumstances adversely affected financial reporting systems, internal control over financial reporting (ICFR) and disclosure controls and procedures? If so, what changes in controls have occurred during the current period that materially affect or are reasonably likely to materially affect ICFR?
Is there an expectation that demand for products or services will be adversely affected?
Is a material adverse impact to the supply chain or the methods used to distribute products or services anticipated?
Are travel restrictions and border closures expected to have a material?

As published by the SEC, the above list is illustrative but not exhaustive and each company will need to carefully assess COVID-19’s impact and related material disclosure obligations. The Division encourages disclosure that is tailored and provides material information about the impact of COVID-19 to investors and market participants.

SEC Registrants…Reporting Earnings and Financial Results

“The ongoing and evolving COVID-19 impact will likely make it more difficult for companies and their auditors to complete the work required to maintain timely filings and we encourage companies to proactively address financial reporting matters earlier than usual. For example, to the extent a company or its auditors will need to consult with experts to determine how the evolving COVID-19 situation may impact its assets, including impairment of goodwill or other assets, it should consider engaging with those experts promptly so that its reporting remains as timely as possible, as well as complete and accurate.”
According to the March 25 SEC Release

In this section I will summarize some of the highlights from the March 25 SEC Release as it relates to reporting earnings and financial results.

Although not required to do so, companies often release earnings estimates and other financial results in advance of finalizing the required financial reporting for the relevant period. There may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In these situations, the Division disclosed that it would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results. For example, under this position, if a company intends to disclose on an earnings call its earnings before interest, taxes, depreciation and amortization (EBITDA), it could reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges. A non-GAAP financial measure should not be disclosed more prominently than the most directly comparable GAAP financial measure or range of GAAP measures. In addition, in filings where GAAP financial statements are required, such as filings on Form 10-K or 10-Q, companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.

To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it would be appropriate to highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.

In addition, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the above position, it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors. The SEC’s release reminds companies that it does not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company. Rather, if used, companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s results. If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.

Companies may consider presenting metrics related to COVID-19, or changing the method by which it calculates a metric as a result of COVID-19. In these cases, the SEC reminds companies of the principles explained in recent Commission guidance related to metrics, specifically Release No. 33-1075

Does the COVID-19 crisis affect audits of financial statements?

I am aware that many are asking how audits…those in-process or those yet-to-begin…might be impacted by the COVID-19 crisis.

I will give this subject a very light touch in this posting, as this may be a very broad issue. Since many have asked about it I wanted to at least get the conversation started. The AICPA has published many resources which can be found here:

https://www.aicpa.org/interestareas/frc/covid19.html

This link includes an accounting and auditing FAQ document. The FAQ document addresses many accounting questions and the possible impact on the audits for a wide range of topics. Some of the topics addressed are:

Access to Books and Records
Asset Impairments
Emphasis‐of‐Matter Paragraphs and Types of Auditor’s Reports
Fair Value of Investments
Fraud Inquiries
Going Concern
Internal Control
Inventory Observations
Management Representation Letters
Risks and Uncertainties
Subsequent Events

Going Concern Considerations

One of my prior posts included a discussion on going concern considerations. Since I have seen many questions about how going concern considerations might be affected by COVID-19 I felt it appropriate to include this update.

GAAP (FASB ASC 205‐40) requires management to evaluate an entity’s ability to continue as a going concern within one year after the date the financialstatements are issued (or available to be issued, when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists whenconditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due withinone year after the date that the financial statements are issued. Disclosures in the notes to the financial statements are required if management concludes thatsubstantial doubt exists or that its plans alleviate that substantial doubt.

The ability of an entity to continue as a going concern is affected by many factors and the consequences of COVID‐19 may impact those factors as they relate to the particular audit client’s facts and circumstances.

Since the relevant period is generally one year from the date the financial statements are issued, the evolving effects of the COVID‐19 crisis may affect the evaluation of the audit client’s going concern evaluation. These effects might impact some industries (restaurants, entertainment, airlines, etc.) more than others – but might also affect the customers and vendors of these industries as well.

The ability of an entity to continue as a going concern is affected by many factors, including the industry and geographic area in which the entity operates, thefinancial health of customers and suppliers of the entity, and the accessibility to financing that is available for the entity. The consequences of COVID‐19 mayimpact the factors in evaluating the ability of an entity to continue as a going concern. They may cause a decline in an entity’s operating results and financialposition. As such, entities and auditors may need to evaluate the latest relevant information related to their assessments of going concern. Consideration of liquidity received from government relief programs may also factor into the assessment.

Sources:

https://www.sec.gov/investment/staff-statement-im-covid-19

https://www.sec.gov/corpfin/coronavirus-covid-19#_ftn2

Andrew M. Mintzer, CPA is a forensic accounting with the Los Angeles office of Hemming Morse, LLP. He is a past chair of the California Society of Certified Public Accountants.

This article discusses GAAP and professional standards in general – I have not consider any specific situations. The application of GAAP or auditing standards to a particular situation depends on the specific facts and circumstances and analysis of the applicable accounting or auditing standards. Therefore this article is educational in nature and does not represent professional accounting or auditing advice or services

GAAP Matters – When the Going “Concern” Gets Tough…

Andy Mintzer, CPA

Going Concern

According to the Financial Accounting Standards Board (FASB), under generally accepted accounting principles (GAAP), continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. This is often referred to as the “going concern assumption”.

Why is the “going concern assumption” important?

If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting. Finding a financial statement prepared under the liquidation basis of accounting has been said to be about as rare as a unicorn sighting. Nevertheless there is often news surrounding “going concern” issues of a particular company. This article will touch on some of the background and overarching concepts necessary to understand this important area.

gray scale photo of gears — Photo by Pixabay on Pexels.com

Financial statements prepared using the liquidation basis of accounting present relevant information about an entity’s expectedresources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation. The entity should include in its presentation of assets any items it had not previously recognized under U.S. GAAP but that it expects to either sell in liquidation or use in settling liabilities (for example, trademarks).

Are disclosures about the entity’s ability to continue as a going concern important even if liquidation accounting is not used?

Yes!

There is a generally a wide range of potential financial statement disclosures that are expected before an entity is required to adopt a liquidation basis of accounting – and it is these disclosures (or lack thereof) that financial statement readers should be on alert for.

For example:

There is substantial doubt about the entity’s ability to continue as a going concern but liquidation is not imminent.

Even if an entity’s liquidation is not imminent, there may be conditions or events that nevertheless raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but relevant conditions and events should be disclosed and described.

“We’ve got it covered”

And in fact, if conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should nevertheless disclose information that enables users of the financial statements to understand (1) principal conditions or events that raised substantial doubt (2) Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, and (3) Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

It is often misunderstood that the going concern assumption deals with the entity’s ability to “continue as a going concern“…not merely continue in business. I have heard claims that if the company can expect to keep the lights on they can avoid the disclosures about the substantial doubt to continue.

Not so.

According to the FASB, ordinarily, conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern relate to the entity’s ability to meet its obligations as they become due. Management’s evaluation shall be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued.

Management shall evaluate whether relevant conditions and events, considered in the aggregate, indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The evaluation initially shall not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (for example, plans to raise capital, borrow money, restructure debt, or dispose of an asset that have been approved but that have not been fully implemented as of the date that the financial statements are issued). If these potential mitigating effects are underway – but not fully implemented – this initial evaluation cannot take them into account as described by the FASB guidance.

Going Concern Disclosures – a brief history

Prior to the issuance of ASC 2014-15 by the FASB in 2014there was no guidance in authoritative “FASB GAAP” about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures.

But if you recall hearing about going concern issues before 2014 your memory is not failing you. U.S. auditing standards and federal securities law require that an auditor evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for a “reasonable period of time”. Thus, the source of what financial statement preparers considered “generally accepted” had its origin in the auditing standards. As a side note this was also true for the financial statement concept of subsequent events – this accounting concept appeared in authoritative auditing literature before the FASB adopted a standard. I was a member of the AICPA’s Accounting Standard Executive Committee from 2001 through 2005 – during that time we considered a project to issue Accounting Statement of Positions to codify in authoritative GAAP some of these accounting concepts that resided in the auditing standards – that is, move the concepts to accounting literature. Before we could undertake this project, however, the FASB indicated that it would be picking up this project…which they ultimately did.

So back to the auditing standards…under these auditing standards a “reasonable period of time” was defined as a period not to exceed one year beyond the date of the financial statements being audited. So if the entity’s fiscal year is a calendar year-end – the going concern evaluation period was through the following December 31. This meant that the length of the period of time that the entity evaluated varied with the date the financial statements were issued. For example, calendar year-end financial statements issued in March had an evaluation period of time lasting about nine months – but financial statements issued in July only required an evaluation period for the remainder or the year – or about five months.

One of the ways the recent FASB authoritative GAAP standard changed the going concern evaluation is by redefining the time horizon. No longer will the time horizon be limited to one year after the date of the financial statements – the new requirement is for the horizon to generally consider whether facts and circumstance raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Thus, a calendar-year financial statement issued in June, for example, which prior to this new standard only needed to consider the time horizon through the next December 31, will not need to consider whether there are facts and circumstances which raise substantial doubt through the next twelve months. Many years ago I was involved in a matter where the entity’s financial statements were not issued until ten months after its year – thus the going concern evaluation period was comparatively short. Had this new GAAP standard been in effect the going concern evaluation period would have extended an additional ten months past the next calendar year-end.

For readers of financial statements prepared in accordance with International Financial Reporting Standards (IFRS) please consider the evaluation under those standard as “In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future, which is at least, but is not limited to, twelve months from the end of the reporting period.”

U.S. auditing standards also require an auditor to consider the possible financial statement effects, including footnote disclosures on uncertainties about an entity’s ability to continue as a going concern for a reasonable period of time and to possibly modify its auditor’s report. The U.S. Securities and Exchange Commission (SEC) also has guidance on disclosures that it expects from an entity when an auditor’s report includes an explanatory paragraph that reflects substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. Auditing standards have evolved somewhat with the development that financial accounting frameworks, such as US GAAP, now contain authoritative accounting guidance – as a result auditing standards now look to the applicable financial reporting framework’s guidance on going concern. Auditing standards require the auditor to evaluate going concern considerations even if the financial statements are prepared under a special purpose financial reporting framework which does not have explicit going concern disclosure guidance.

Disclosures (and sometimes the lack of disclosures) about issues that raise or respond to doubt about an entity’s ability to continue as a going concern are often significant with important implications to the evaluation of the financial condition. This article touched on just some of the background as an introduction to understanding this topic.

Andrew M. Mintzer, CPA is a forensic accounting with the Los Angeles office of Hemming Morse, LLP. He is a past chair of the California Society of Certified Public Accountants.

This article discusses GAAP and professional standards in general – I have not considered any specific situations. The application of GAAP to a particular situation depends on the specific facts and circumstances and analysis of the applicable accounting standards. Therefore this article is educational in nature and does not represent professional accounting advice or services.