Additionally, the challenges of the new accounting standards have become even more daunting in this environment, as the implementation of CECL, revenues and leases are still short term for many companies who may not have the resources to do the job.
How corporate finance teams respond to all of these challenges can have a significant impact on how businesses emerge from the pandemic.
“Accounting and controlling functions are still seen as providers of both numbers and valuable business advice, but the spotlight on them is even hotter right now,” says Steve Barta, Practice Partner Auditing and certification from Deloitte & Touche. “They must provide immediate information on the various business alternatives and the implications for financial reporting, as well as the accounting for rare and new transactions due to the coronavirus.
Barta shares these key areas that CFOs currently face and where additional attention may be needed.
Depreciation. “A lot of companies are used to dealing with goodwill, intangible and fixed asset impairment issues, but the entire left side of the balance sheet needs to be assessed for impairment,” Barta explains. “Businesses need to know which accounting standards apply, master all models, prioritize their analyzes and identify where they need help. He suggests that it is very difficult to estimate cash flow for valuations at this time given the uncertainties of government actions, the timing of the lifting of restrictions and the economic recovery.
Income. “What we are seeing now more than ever are companies changing contracts to make things work with their suppliers and customers, for example by offering relief from penalties and minimum quantities,” Barta said. “The key is to assess whether these are contract changes under ASC 606, or simply the fulfillment of the terms of the existing contract.” A general question to consider is whether the pandemic is considered a “force majeure” event under the wording of the existing contract.
Debt. As with income contracts, changes to debt agreements should be evaluated to determine whether they are modifications or forfeitures according to accounting guidelines. “There are many issues with financial instruments and debt under the CARES Act, especially for small businesses getting new SBA loans,” Barta said. “The structure of these is unique in that some of the loans are repayable, and these must be evaluated formally against substance according to the intent of the CARES Act.” There is no guidance in US GAAP that deals specifically with accounting for a forgivable loan from a government entity, and businesses may have to look to the accounting contribution model for government grants.
Investments. Barta recommends that companies take inventory of all their investments and consider which of the different depreciation models applies to each of them. “Investments that don’t have an easily determinable market value are more difficult to value because they have to be valued now and periodically for depreciation,” he says. “It’s important to have a good depreciation analysis because once you write down these investments, you usually can’t get them back in the absence of a trade in the market. “
Internal controls. As businesses learn to operate in a remote environment, they face unique internal control challenges. “Some people may not be able to perform their usual check-ups because they are sick, a family member is sick, are home-schooling their child, or do not have access to Internet and can not work from home, ”says Barta. This is an area where third parties can help, including best practices for remote shutdowns, strengthening internal controls, and creating layoffs.
Disclosures of financial statements. “A question I get often is, ‘What should we say? “Says Barta.” I tell clients that there is what is required in the accounting literature, but clarity and transparency are very important right now as the coronavirus pandemic has created new, unprecedented problems. ” It encourages companies to disclose what they have done so that readers understand, such as how they accounted for a new loan or where they classified an expense in the income statement, especially if the accounting literature is unclear. .
Rather than doing it alone, Barta recommends that financial executives turn to their auditors, accountants, and other professionals for advice. “There is no limit to the circumstances in which companies can reach out,” suggests Barta.