There are many implications of the current COVID-19 pandemic. First and foremost is the consideration of the health and well-being of those impacted by the pandemic, including those who have contracted the disease, people caring for those who have contracted the disease and the healthcare providers and personnel in related fields who are treating these patients.

Also, as financial and accounting professionals, we have a significant role to play in providing valuable insights into the effects of COVID-19. For example, the financial impact on businesses impacted by COVID-19 will be an integral input into the consideration of the need for any additional federal or state assistance. This financial impact will also help to govern the need for additional regulatory relief, as well as multiple other efforts related to the COVID-19 mitigation and recovery efforts.

So what is this financial impact and how do we measure it? It is not an overstatement to say that the application of virtually all of the Accounting Standards Codification (ASC) will be impacted in one way or the other by COVID-19. As will the accountant reporting frameworks established by the AICPA such as the Statements on Auditing Standards (SASs) and Statements on Standards for Accounting and Review Services (SSARS). These impacts will be varied, with greater impacts found in certain industries more than others, as well as felt at different moments in the financial reporting cycle. While these standards provide a robust framework to deal with most, if not all, of these accounting and financial reporting implications, the sheer volume of this guidance can be overwhelming. What we need is a framework for assessing what guidance is applicable and when we need to consider it as we advise our clients and continue to provide these essential services.

A Framework for Assessing the Accounting and Financial Reporting Impact of COVID-19

A helpful way to assess this impact is to break the applicability this accounting and reporting guidance into four broad categories related to where entities are in the financial reporting cycle:

• Entities who have already recently released financial statements in the backdrop of COVID-19
• Entities for which the end of the reporting period has passed but for which financial statements have not yet been issued.
• Entities approaching the end of their financial reporting period
• Entities with significant time before the end of their next financial reporting period.

Let’s look at the major accounting and financial reporting considerations for each of these categories

Entities which have already recently issued financial statements

Entities which have already issued financial statements in the backdrop of COVID-19 are generally those whose reporting period ended on December 31, 2019, or before. This category may include some entities with reporting periods ending after December 31, 2019, though many of the auditing or other engagements resulting in the issuance of an accountant’s report related to entities with such period-ends are still ongoing.

For these entities, the financial accounting impact is generally minimal, especially in the short-term. The two largest financial reporting impacts for such entities are consideration of subsequent events and consideration of whether substantial doubt exists concerning the entity’s ability to continue as a going concern. As for the subsequent event consideration, the consensus position is that the impacts of COVID-19 would be considered a Type 2, or disclosure only type of subsequent event.  Depending on the report date, the information provided in subsequent event disclosure detailing the uncertainty related to COVID-19 may vary but no financial impact should be recorded in the financial statements as of the reporting date.

As to going concern disclosure and reporting considerations for those reporting under U.S. GAAP, the impact will be based on the report release date. Given the everchanging impacts of COVID-19, from mandated business closures, restrictions on movement and governmental assistance programs, an entity’s assessment of its going concern risk, and the related impact on the accountant’s report, could literally change day to day. The key is for the entity, and its accountants, to sufficiently document that they evaluated the relevant information that was available at the date that the report was issued and how they used this information to support the sufficiency of the financial statement disclosures and related accountant reporting implications. There is no need to reassess these conclusions for information that was obtained after the report release date.

Entities for which the end of the reporting period has passed but for which financial statements have not yet been issued.

Entities in this classification have two significant questions to answer. First, is the impact of COVID-19 just a “disclosure only” or Type 2 subsequent event or did the events which led to the post-reporting date financial impact of COVID-19 exist as of the reporting date, resulting in a Type 1, or recognition type of subsequent event. Second, does the impact of COVID-19 create substantial doubt about the entity’s ability to continue as a going concern? The answers to these two questions could have significant impacts on the entity’s financial statements.

The answer to the first question is definitely impacted by the date of the financial reporting period. In reality, few entities, especially outside of retail entities, have reporting periods as of the end of January, or even February, for that matter. As for January 2020 reporting period ends, a review of sample disclosures provided in the AICPA’s Center for Plain English Accounting’s March 18, 2020 Special Report, Consequences of COVID-19 Financial Reporting Considerations, indicates that the impact of COVID-19 would still be considered to be a Type 2, disclosure only subsequent event as of January 31, 2020. However, as more time passes, and more information became known, there will be a threshold crossed where the impacts of COVID-19 on the financial statements that occurred after the reporting date related to circumstances that existed as of the reporting date, thereby requiring recognition. Judgment, and documentation thereof, will be required when both entities and their accountants make this assessment. To date, no definitive guidance has been issued by standard setters.  However, as a reference point only, the Deloitte Financial Reporting Alert 20-2, Financial Reporting Considerations Related to COVID-19 and an Economic Downturn, stated that, “For entities whose balance sheet date is in February or before, we believe that much of what is known about events related to COVID-19 as of the date of the publication (March 25, 2020) would be viewed as an unrecognized rather than a recognized event.” This would clearly not be the case for entities with a March 31, 2020 reporting date.

The key is for entities and accountants to effectively document the basis for their conclusions. Further, while consideration of individual facts and circumstances may result in a different conclusion, barring such situations, firms should consistently apply this conclusion to all applicable engagements.

As for the second question, as the financial statements in this category have not yet been issued, both the entity and its accountants, must following the guidance in ASU No. 2014-15 (ASC Subtopic 205-40) and either SAS 132 or SSARS No. 24, as appropriate, respectively, with regards to the accounting, disclosure and reporting implications of the consideration of the entity’s ability to continue as a going concern.

Entities approaching the end of their financial reporting period

For entities approaching the end of their financial reporting period, the only consideration is not which accounting and reporting guidance will apply but when the entity and its accountants will need to apply it. The accounting effects of such events such as suspension of operations, the resultant economic downturn and other effects of COVID-19 will have occurred before the reporting date and should be reflected in the financial statements of the entity as of the reporting date. Further, information that becomes known after the reporting date related to the impact of COVID-19 will have related to events that existed at the balance sheet date, thereby requiring Type 1 subsequent event treatment, or recognition.

Further, both the entity and its accountants will need to assess whether substantial doubt exists regarding the entity’s ability to continue as a going concern and follow the appropriate accounting and reporting guidance, respectively.

Application of the applicable guidance that is relevant to the accounting for the implications of the COVID-19 pandemic can be complex and will likely involve entities performing analyses and other procedures that they have little to no experience performing. For instance, consideration of the need for an impairment charge related to long-lived assets requires not only the determination of a triggering event but also the determination of cash flows for long-lived assets such as PP&E at the lowest possible level of estimated cash flows, the determination of undiscounted net-cash flows for that asset group and lastly, the application of the fair value principles found in ASC 820. Lastly, the allocation of such impairment charge to the impacted asset group involves another complex process. This is not easy accounting.

In other areas of accounting, the applicable guidance, such as that related to goodwill impairment, will be based on whether an entity has adopted recently issued updated accounting guidance.

The accounting profession’s challenge and opportunity

Irrespective of where entities are in their financial reporting cycle, the accounting and reporting considerations described above will impact all entities, and their accountants, at some point in the future. As those with the expertise in their topics, it is our responsibility to have a thorough understanding of the accounting and reporting considerations related to COVID-19 and serve as trusted advisors to our clients as they navigate through these unprecedented times. It is our opportunity as a profession to add to the portfolio of relevant information that will allow decision-makers to make informed decisions regarding the response to COVID-19 and to make a true difference based on our expertise.

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Rich Daisley, CPA, is Vice President of Accounting and Financial Reporting Curriculum for Surgent CPE. With over 26 years of experience in the accounting and auditing field, Mr. Daisley has worked in both the client service setting, mainly for PwC’s Capital Markets and Accounting Advisory Services Group and for PECO Energy’s Merger and Acquisition Group, and in the internal capacity setting as a course developer and facilitator creating leading training courses for PwC and Surgent. Rich lives in suburban Philadelphia.