Accounting and Disclosure Complexities Due to COVID-19

On Friday, April 3, 2020, the United States Securities and Exchange Commission (“SEC”) released a public statement titled Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19.  The statement, written by Chief Accountant Sagar Teotia (“Teotia”), acknowledges the many challenges and difficulties that COVID-19 will create for companies and accounting firms. 

Amongst the issues identified by Teotia, is the difficulty surrounding judgments and estimates during uncertain times.  Due to COVID-19, many businesses will be required to make significant judgments and estimates relating to fair value and impairment considerations, hedging, revenue recognition, and going concern, amongst others.  Companies utilize judgments and estimates to approximate the amount to be debited or credited on items for which no precise means of measurement are available.  Generally, these judgments and estimates are based on specialized knowledge derived from experience and training.  As such, judgments and estimates relating to COVID-19 are inherently difficult because of the unique nature of the virus and the virus’ affects on global and domestic businesses, markets, and governments.

Since each judgment and estimate made by a company can significantly impact a company’s financial statements, Teotia also stressed the importance of required disclosures.  “We in OCA urge all participants in the financial reporting system to continue to work together to provide investors with the high-quality financial information they need to make decisions amidst uncertainty.”

In addition to the statement issued by the SEC, many public accounting firms have provided guidance identifying similar issues.  On April 2, 2020, Ernst & Young, LLP (“EY”) published an article titled Five financial reporting issues to consider as a consequence of COVID-19. The EY article identifies going concern and liquidity, impairment assessment, contract modification, fair value measurement, and government assistance and income tax as reporting issues that will likely be more difficult due to COVID-19.  Similar to Teotia’s statement, the EY article stresses the importance of disclosure, “[i]n this context, transparency is key.  There is a vital need for reliable information to regain trust in uncertain times, and part of that will be provided through financial reporting.”

Similarly, on April 2, 2020, PricewaterhouseCoopers, LLP (“PwC”) provided an update to a previously issued FAQ on accounting for COVID-19 and market volatility.  The PwC FAQ identifies goodwill, asset impairment, hedging, revenue, and internal control over financial reporting, amongst other items, that are likely to be impacted by COVID-19.  PwC notes that “[g]iven the current market conditions and concerns about the growing pandemic, the first quarter is likely to be particularly challenging from an accounting and reporting perspective for many companies.”  Sharing the sentiment of Teotia and EY, PwC underscores the necessity of adequate disclosures.  “Because of current market conditions, it may be necessary for companies to make additional disclosures about significant accounting estimates and management judgments, especially those involving valuation and impairment.”

The issues identified by the SEC, EY, and PwC are likely to impact companies’ financial statements for the foreseeable future.  However, through adequate reporting and disclosure, these companies should be able to maintain regulatory compliance and investor confidence.