Entities are carefully evaluating the significant impacts that coronavirus is having on their operations and their ability to meet their obligations. In addition to the obvious impact these evaluations may have on the recognition and measurement of amounts in the financial statements (e.g., goodwill, receivables, inventory), there also may be impacts on the required disclosures (e.g., risks and uncertainties, going concern) or even the basis of reporting itself (e.g., liquidation basis).
Topic 275, “Risks and Uncertainties,” of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC) requires disclosures about risks and uncertainties including certain changes in estimates and vulnerability to concentrations. This requirement would include, but is not limited to, disclosures about significant impacts resulting from the coronavirus, such as location and production closures, decreased demand for products or services, difficulties obtaining products or services, an inability to collect from customers on outstanding receivables, the ability to access additional financing because of liquidity issues, and other relevant matters.
ASC 205-40, “Presentation of Financial Statements - Going Concern,” requires management to evaluate the entity’s ability to continue as a going concern within one year after the date the financial statements are issued or are available to be issued. This evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date the financial statements are issued. Similarly, Governmental Accounting Standards Board (GASB) Statement No. 56, Codification of Accounting and Financial Reporting Guidance Contained in the AICPA Statements on Auditing Standards, requires financial statement preparers to evaluate whether there is substantial doubt about a governmental entity’s ability to continue as a going concern for 12 months beyond the date of the financial statements. GASB Statement No. 56 further requires that, if information is currently known to the governmental entity that may raise substantial doubt shortly thereafter (for example, within an additional three months), such information also should be considered. Entities should disclose in the financial statements if management determines that substantial doubt exists. The required disclosures differ depending on whether or not management’s plans alleviate the substantial doubt.
Given the current economic environment created by the coronavirus, even an entity that historically has not had indicators that there is substantial doubt about its ability to continue as a going concern should consider the impact the coronavirus may have on such an assessment. When considering whether an entity will continue for a reasonable period of time, management should evaluate impacts on an entity’s business from conditions such as a planned or forced shutdown, government-imposed restrictions, reduced customer demand or an inability to collect receivables from customers. Some or all of the challenges a business is facing may be mitigated by management’s plans, for example, plans to dispose of assets, borrow money or increase capital, or reduce or delay planned expenditures. When evaluating management’s plans, management may need to consider different factors or consider projections other than those previously necessary, such as:
- Whether historically based projections are reasonable to predict future results
- Whether access to capital from investors or lenders is impacted by the current environment
- Use of probability weighting for different outcomes of future events (e.g., return to business operations on April 15 compared to April 30, May 31 or a later date, changes in business operations due to longer-term impacts of social distancing)
- Impacts of government stimulus packages on future operations, the entity’s eligibility for receipt of such support (e.g., loans, grants, tax relief), and the timing of any such support
The impact of coronavirus may vary based on the entity’s industry. Some industries such as gaming, retail, travel, hospitality, industrial manufacturing, oil and gas, and other service businesses may be significantly impacted by closures of business activities and slowdown in demand for products, in addition to other factors. Conversely, other industries such as grocery, consumer staples and defense may not be as significantly impacted in current conditions, but may need to consider collections of receivables for products sold and future declines in sales based on consumers currently purchasing excess supplies.
See Coronavirus: Financial reporting considerations for an overview of additional financial reporting matters that may be affected by the coronavirus pandemic.
