The Financial Accounting Standards Board has issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842) Effective Dates for Certain Entities. ASU 2020-05 finalizes the effective date changes discussed below. These changes come as a direct result of the effects of COVID-19 on organizations.
Related to Topic 606, Revenue from Contracts with Customers, the FASB voted to expand its original deferral limited to franchisor entities to all private entities that have not yet adopted the guidance. This defers the effective date for Topic 606 for one year for private entities and nonprofit entities that have not yet issued their financial statements.
Additionally, the FASB voted to clarify that the Topic 842, Leases, proposed deferral is available for any nonprofit entity that has not yet issued its generally accepted accounting principles compliant financial statements or made those financials statements available for issuance, including those that have published financial information that reflects adoption of Topic 842 (for example, quarterly financial statements filed on EMMA).
The FASB also discussed deferral of Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made. The FASB Board voted to not defer the provisions of ASU 2018-08.
Accounting and Financial Reporting Considerations
Among the many consequences of COVID-19 are the financial reporting challenges and implications organizations at every level face. As your business or organization looks ahead, it is important to begin assessing risk and determining preventative actions and remedies to limit the impact on your business. Create a plan to manage cash flow and mitigate loss and be sure your management team considers these important financial reporting factors.
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Accounting estimates are important to many business and organizations, requiring management to make judgments regarding anticipated future results. The estimation process is easier when things seldom change but can become difficult when business and organizations are faced with the uncertainty of something like COVID-19.
The strength of an entity’s balance sheet or statement of financial position is rooted in the value of its assets. Asset values may be declining in the current economic environment, including significant declines after year-end. Has your management team considered potential asset impairment resulting from COVID-19?
Variable Consideration Under ASC 606
Under the new revenue recognition standard, variable consideration should be estimated and recognized throughout the life of the contract only to the extent that it is probable that a significant reversal in the amounts of cumulative revenue recognized will not occur. At the end of each reporting period, an entity should update the estimated transaction price (including updating its assessment of whether an estimate of variable consideration is constrained) to represent faithfully the circumstances present at the end of the reporting period.
Lease modifications due to COVID-19 fall under Accounting Standards Codification (ASC) 840, Leases, or ASC 842, Leases, (depending on whether the entity has adopted the new lease standard). ASC 840 requires lessees and lessors to analyze lease modifications (other than renewals or extensions) and determine whether a substitution of the modified provisions in the original lease would have resulted in a different lease classification had those provisions been in place all along.
Under ASC 842, lease modifications require the lessee to determine whether the proposed changes are a modification of the existing lease contract or are an entirely new contract.
A business continuity plan is more vital than ever before.
There are two types of subsequent events that entities must consider when evaluating the impact of subsequent events on their financial statements. The first type is a recognized subsequent event, which means the event is recorded in the financial statements. This type of event consists of events or transactions that provide additional evidence about conditions that existed as of the balance sheet or statement of financial position date. The second type is a non-recognized subsequent event, which consists of events that provide evidence about conditions that did not exist at the date of the balance sheet or statement of financial position date but arose subsequent to that date.
What does that mean for your company or organization? COVID-19 has been widely recognized as the second type of subsequent event. This means your financial statements probably will not be adjusted for many of the impacts of COVID-19, but disclosures under this standard, or any of the other discussed in this section will likely be appropriate.
As you evaluate your risks and determine if operations have significantly changed, it is important to consider whether your financial statements should include a subsequent event disclosure. We have provided two sample disclosures below:
Subsequent to year-end, the United States and global markets experienced significant declines in value resulting from uncertainty caused by the worldwide coronavirus pandemic. The Foundation is closely monitoring its investment portfolio and its liquidity and is actively working to minimize the impact of these declines. The Foundation’s financial statements do not include adjustments to fair value that have resulted from these declines.
Subsequent to year-end, the Company has been negatively impacted by the effects of the worldwide coronavirus pandemic. The Company is closely monitoring its operations, liquidity, and capital resources and is actively working to minimize the current and future impact of this unprecedented situation. As of the date of issuance of these financial statements, the full impact to the Company’s financial position is not known.
As the impacts of COVID-19 continue to expand, many entities will be impacted in some way or another. Industries and geographic regions, consumers and suppliers, and the ability to access financing will be at the forefront. COVID-19 factors could quickly result in a deterioration of a company’s operating results and financial position, potentially to a point where financial viability may not be certain. Accounting standards require management to evaluate the ability to continue as a going concern from one year of the date of issuance of their financial statements.
After the date of financial statements but before the financial statements are issued, information may become available indicating an asset was (or it was at least reasonably possible that it was) impaired or a liability was incurred after the date of the financial statements. If the underlying event did not occur before the date of the balance sheet or the statement of financial position (the second type of subsequent event discussed above), no accrual should be made in the financial statements; however, financial statement disclosures may be necessary about the nature of the loss contingency, including an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. Evaluating loss contingencies can be difficult and will require a significant amount of judgement and evaluation of the current factors by your management team.
Risks and Uncertainties Disclosures
ASC 275, Risks and Uncertainties, requires an entity to disclose risks and uncertainties that could significantly affect the amounts reported in the financial statements in the near term. The impacts of COVID-19 are generally not the type of subsequent event that requires an adjustment to the financial statements, but management’s evaluation of risks and uncertainties and their impact on amounts reported in the financial statements in the near term could most certainly result in a financial statement disclosure that discusses considerations such as the negative impact on significant estimates and an increased vulnerability due to certain concentrations.
Auditor and Accountant Reporting – Emphasis of Matter
If COVID-19 has a material impact on your company or organization, your auditors may determine that an emphasis of matter paragraph (EOM) in the auditor’s report is appropriate. The EOM is used to direct the reader’s attention to the events and transactions being discussed in the notes to the financial statements and their effects on the entity. Auditing standards indicate that a major catastrophe that has had, or continues to have, a significant effect on the company’s financial position is an example of circumstances where the auditor may consider it necessary to include an EOM. Engage in a conversation with your auditor early in the audit process to make sure you understand their evaluation process for determining whether to include an EOM in your audit report.
Financial Statements Prepared Under a Special Purpose Framework
Entities issuing financial statements under a special purpose framework (SPF), for example the income tax basis or the modified cash basis, often question whether United States Generally Accepted Accounting Principles (U.S. GAAP) standards, such as the ones discussed here, apply to them. Financial statements prepared in accordance with a SPF should include informative disclosures similar to those required by U.S. GAAP when those financial statements contain items similar to those prepared in accordance with U.S. GAAP.
The Impact of COVID-19 on Your Financial Reporting
There’s much to think about when it comes to financial reporting during the coronavirus pandemic. Be proactive and review financial statements now to ensure your business or organization complies with financial reporting requirements through this challenging time as well as continues to prepare for the future.
The impact of the coronavirus is far reaching and is impacting the way we do business.