The coronavirus pandemic has left CPAs with a lot of balls in the air, creating a whole new ballgame when applying Generally Accepted Accounting Principles (GAAP).
Should COVID-19 be considered a one-time event or the new normal? Some key areas CPAs may want to pay attention to are:
- Going concern
- Subsequent events
- Government assistance
- Current expected credit losses (CECL)
- Asset impairment
Accounting estimates involve identifying, measuring, and disclosing future amounts or evaluating an event that has occurred where information cannot be collected in time for financial reporting. Accounting estimates are difficult enough. The pandemic has made accounting estimates more complex even for those with experience and training. When using professional judgement while making accounting estimates involving COVID-19, consider the following:
- Have a good understanding of the entity.
- Perform a meaningful risk assessment containing information that can be applied to estimates.
- Document information available at the time.
- Question if all estimates are reasonable.
- Disclose circumstances that change estimates after the fact.
- Involve experts and evaluate their work.
A going concern assessment relies on evaluating future plans for the operations of an entity. An entity is usually a going concern if management has a realistic plan to avoid liquidation. Because of the pandemic, there are many indicators of a going concern to consider, including:
- A pause in operations causing less demand for services and goods
- Uncertainty about future restrictions on operations
- Financial changes and the inability to pay down or obtain loans
- Lack of resources such as materials, services, and workers
- Intercompany money that is no longer available
- Realization and write-downs of accounts receivable
- Cancelled events where money will not be recovered
- Reliance on vendor credit that will no longer be available
- Short-term assets that may not be recovered
- Lack of government assistance
Many leases have been renegotiated because of COVID-19 to reflect a decrease in the ability to pay and realize revenue. The timing is less than perfect with the crossover happening between Financial Accounting Standards Board (FASB) Topic 842 and Topic 840 – Leases. To make accounting for rent concessions easier during the pandemic, FASB has simplified the accounting guidance. The FASB staff considers it acceptable to make an election to account for rent concessions under Topics 842 and 840 as though enforceable rights are part of the lease agreement even if they are not. Accordingly, lessees have the option to avoid evaluating if a rent concession associated with COVID-19 is a lease modification. This option prevents the costly and time-consuming work involved in determining if a rent concession is a new lease.
When agreements are made to modify rent payments, CPAs should refer to the original lease agreement, get proof of changes, and document their understanding of the modified conditions.
The rate of change going on each day because of the pandemic almost guarantees subsequent events will have to be disclosed in financial statements. Types of subsequent events include
- Adjusting subsequent events where circumstances existing at the balance sheet date require financial statement adjustment
- Non-adjusting subsequent events where circumstances happening after the balance sheet date are required to be explained and disclosed if amounts are material
When performing an audit, CPAs should get audit evidence about what happens between the date of the financial report and the date of the audit report. When doing this, double check whether subsequent events are properly reported and disclosed in the financial statements.
Government support in the form of the Coronavirus Aid, Relief, and Economic Security (CARES) Act was made available because of COVID-19. The CARES Act includes the Payroll Protection Program (PPP) among other assistance. When accounting for government grants, remember they may not be recognized until there is reasonable assurance of compliance with the conditions of the grant. When accounting for amounts advanced to supplement employee wages, record the support as a government grant not as a reduction to payroll expense. Government grants related to income can be presented separately as a part of profit and loss or under a general account such as other income.
Remember that pandemic-related payroll assistance does not account for employee fringe benefits such as bonuses, holidays, vacation days, sick days, and pension liabilities. There could be additional accruals for employees who have been furloughed and are still entitled to these benefits unless other agreements are made.
Current Estimated Credit Losses (CECL)
According to CECL, an entity has to estimate lifetime expected credit losses for all loans, leases, debt securities, trade receivables, and other financial assets. Losses are estimated using past events and current circumstances along with an acceptable estimate of future collections. The CARES Act has provided temporary relief for entities required to adopt CECL.
The pandemic has changed normal business operations. When determining impairment, carrying amounts should not be greater than recoverable amounts at the balance sheet date. When evaluating long-lived assets for impairment, it is important to measure factual evidence to figure out if problems were due to COVID-19.
There is no doubt that the coronavirus pandemic is having a major impact on financial statements. The extent to which it affects financial reporting depends, as always, on the facts and circumstances. All those involved in the financial reporting process should understand the direct and indirect effects of the pandemic on the financial statements. As CPAs address the COVID-19 uncertainty, they should rely on and document professional judgement as it is important to the public now more than ever.
Susan Firriolo, CPA, CITP, CGMA, CISA, is president of Tax Correspondence Service and a leader of the Technology Work Group within the New Jersey Society of CPAs’ Accounting & Auditing Standards Interest Group. She can be reached at firstname.lastname@example.org. Reprinted with permission of the New Jersey Society of CPAs.