How to Put Together the Financial Reporting Puzzle Amid the Pandemic

By Susan Firriolo, CPA, Tax Correspondence Service On Jan 6, 2021

The coronavirus pandemic has left business owners puzzled and with a lot of missing pieces when it comes to financial reporting. Is COVID-19 a one-time event or the new normal?  

Items that business owners should review include the following:  

• Estimates 
• Going concern 
• Leases 
• Subsequent events 
• Government assistance 
• Current expected credit losses (CECL) 
• Asset impairment 

Estimates 

Accounting estimates involve amounts or events where information cannot be collected in a timely manner. The pandemic has made accounting estimates more complex even for those with experience. When making accounting estimates amid the pandemic, take the following steps: 

•  Assess business risk 
• Record information 
• Make reasonable estimates 
• Identify changes after the fact 
• Involve experts and evaluate their work 

Going Concern 

A business is a going concern if management can realistically avoid liquidation. Consider the following indications of a going concern: 

• Less demand for services and goods 
• Uncertainty about future restrictions on operations and employees 
• Inability to pay down or obtain loans 
• Diminishing resources 
• Lack of intercompany money 
• Lower realization of accounts receivable and inventory 
• Fading vendor credit 
• Shrinking government assistance 

Leases 

Leases may have been renegotiated because of the pandemic. The timing is less than perfect with the Financial Accounting Standards Board’s new lease reporting rules taking effect. Rules to account for rent concessions have been simplified during the pandemic. A rent concession as a result of the pandemic does not have to be evaluated for whether or not it is a lease modification. When agreements are made to change rent payments, business owners should refer to the original lease agreement, get proof of changes, and record their understanding of the modified conditions. 

Subsequent Events 

The pandemic almost guarantees subsequent events will have to be addressed. There are subsequent events, which exist at the balance sheet date and require adjustment. There are also non-adjusting subsequent events, which happen after the balance sheet date and will require disclosure in the notes. 

Government Assistance 

The CARES Act includes the Paycheck Protection Program (PPP). Amounts advanced under the PPP should be recorded as other income and not a reduction of payroll or other expense. 

Remember: PPP assistance does not account for employee benefits such as bonuses, paid time off, medical insurance and pensions.  

Current Estimated Credit Losses (CECL) 

CECL requires a business to estimate expected credit losses for all financial assets such as loans, leases, debt securities and receivables. CECL are estimated using past and current events and future collections. The CARES Act has temporarily suspended reporting CECL. 

Asset Impairment 

When carrying amounts are greater than recoverable amounts, impairment has occurred. Some signs of asset impairment include the following:

• Decreasing market value of investments 
• Reduced profitability of equipment 
• Plans to restructure operations 
• Poor operating performance  

Prepaids, inventory and receivables can be impacted by the pandemic and should also be considered for impairment.

About the Author 

Susan Firriolo, CPA, is president of Tax Correspondence Service. She can be reached at [email protected]. 

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