COVID-19: Financial reporting considerations

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How the coronavirus crisis may affect disclosures

The current and potential effects of the COVID-19 outbreak is difficult to assess and predict, but the way companies plan for uncertainty and respond to events are often watched by the financial markets. SEC Chairman Jay Clayton asked the SEC staff to monitor companies’ disclosures in this area and provide guidance or other assistance as needed. As events unfold, companies should consider disclosures about:

  • The direct effects on results of operations, as well as second-order effects (e.g., demand for products or services in affected areas, as well as effects on supply chains, service providers, business partners and global economies)
  • Risks and uncertainties about the potential impact of COVID-19 on future periods, considering how recent events may impact current and future judgments and estimates inherent in financial reporting (e.g., inventory obsolescence, receivables collectibility, debt covenants, impairments)
  • The current and potential future impact on results of operations, liquidity and capital resources (including consideration of trends and uncertainties)

Some public companies have already included disclosures related to COVID-19 in their filings and public releases, and the SEC has stated that they welcome engagement from companies on the reporting of matters related to the potential effects of COVID-19. Of the 364 companies that have held fourth-quarter earnings calls with investors as of February 2020, 38% referenced the coronavirus, while about 25% of those discussed having some impact from COVID-19 or provided modified guidance, according to FactSet

What to look at now

Evaluate financial reporting requirements
For most companies that have a December 31 year end, direct financial effects may first be reported in Q1 filings. Companies should consider the impact of COVID-19 on estimates and judgments inherent in their financial statements. Firms with any type of operations in or business with China could see an impact on the assessment of fair value or asset recoverability related to goodwill, inventory, customer receivables, financial instruments, deferred tax assets, or other impacted assets or liabilities.

Evaluate audit impact
Companies should also consider a discussion with their external auditor to determine if the completion of audit or review procedures has been impacted by the COVID-19 outbreak.

Investors may be looking for transparent disclosure about the current and potential future impacts to the company.

Where to focus next

Consider MD&A disclosures
Companies should evaluate the impact of the virus on their past and future results of operations. MD&A should disclose material events and uncertainties that could cause reported results to not be indicative of future operating results. Investors may be looking for transparent disclosure about the current and potential future impacts to the company. 

Identify other substantive impacts
The applicable financial reporting requirements should be considered as part of any discussion around restructuring, relocation of operations or personnel (temporary or otherwise), and other actions taken by the company as a result of the coronavirus outbreak. 

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