Ideally, companies put in place real-time tracking of COVID-19 impact to underpin decision making with quantifiable evidence. This may enable us to better assess management’s actions and any proposed adjustments in diligence. In instances of less robust financial reporting, rigorous diligence will be needed, more so than in any other times, in order to understand the underlying value drivers and impact of COVID-19 on the growth profile of the business.
To quantify potential adjustments, best practices suggest they are:
- Well supported - not relying on too many assumptions
- Assessed over short periods (e.g. monthly)
- Calculated as discrete items (i.e. no high level calculations)
- Evaluated for impact across all P&L accounts
- For pro forma adjustments, consider if the company has operated on a “normal” basis in recent periods to support any adjustment
- Triangulated with any balance sheet impact / adjustments.
Duration of impact needs to be considered, i.e. temporary vs. permanent, to determine if a one-time or pro forma adjustment is warranted. Continually reassess the underlying facts and circumstances (given the ongoing evolution of the health and economic environment).
Less confidence would be placed on adjustments attempting to simply normalise the P&L to a pre-COVID level (i.e. “as if” scenario without the crisis), as it is probably not realistic and not meaningful as it would likely involve too many assumptions.