Accounting Amidst COVID-19

What’s Different on the Reports and Financial Statements?

By Mark F. Wille
We’re in a major disruption of the U.S. economy. Uncertainly is the byword. The virus has an unknown trajectory while the economy may have another. What do I need to do?

Footnote
To meet standards, you must put in a footnote describing the uncertainty. There are a lot of examples out there. Here is one you might use: “In 2020, domestic and international economies face uncertainty related to the impact of the COVID-19 disease. The Company may be adversely affected through lack of raw materials availability, interruptions in shipping and manufacturing processes, idle or vacant facilities, and decrease in revenue. Management is currently evaluating the impact it will have on future operations.”

You would need to modify the language to suit the individual client’s situation. If risks are known, or if the client’s business has been closed for a period of time, you would need to add those particulars to the disclosure.

On the flip side, a grocery company would need the paragraph but may be doing much better than expected.

Going Concern
Normally, the going concern process is triggered by negative retained earnings or significant income statement losses, and it still is. But this year, even if a business had a wonderful 2019, you must document that you considered going concern in 2020. You should complete the PPC form for going concern for all entities. Additionally, I’m putting a going concern paragraph in every rep letter.

We should be careful as we may be providing an insurance as well as assurance service!

I use a four-level, going concern test.

Level One
I will use this for all clients this year (even preparation only). Here you document in the workpapers the consideration of going concern. 

So, we discuss the current (2020) status of the company. Do they have enough resources to continue business for at least 12 months (I use 24 months – because I’m an old maid) after we issue the financial statements? Normally this could be proven with a simple cash flow projection. Today that projection would have a reduced income in relation to 2019 (or, for certain industries, increased income—think mortgage brokers, remaining essential retail, etc.) 

We all have clients that are completely stopped now. A cash flow projection will not necessarily be easy as we don’t have a crystal ball. But you must create workpapers that properly document your thinking regarding the issues.

Let’s begin to trust and use our professional judgment and professional skepticism again!

If their cash flow projection is positive for the period, you stop at this level. 

Level Two
Here you determine the company plan regarding the causational issues. Normally we see the client has lost a big client or the market has changed for their product. Or they are a new company not yet up to full revenue.

Going concern resolution at this level are the following:
  • The owner agrees to fund personally. Get a confirm and third-party documentation that they have the resources to perform.
  • The entity is a subsidiary of a larger entity with resources. Again, secure a confirm and third-party documentation (like an audit of the upper tier entity).
  • They now have a new client or operating change that makes up for the prior deficit.
In these cases, you document in the workpapers and put in a footnote. If non-disclosure, consider emphasis of a matter.

Level Three
You now think the entity may not last the period. In this case you:
  • Disclose in workpapers;
  • Have a footnote describing going concern; and
  • Place paragraph in report.

Level Four
Once you get to Level Three you must consider and document your consideration of liquidation basis. If the company believes they’re going to close, you need to change to liquidation basis which would require the balance sheet move to fair market liquidation valuations.

If the company decides—or if through legal action it becomes a remote possibility—that they will survive, then the financial statement will be on the liquidation basis.

Additionally, the AICPA has a COVID-19 resource from the center for plain English accounting.

Hopefully these practical suggestions are helpful in this time of uncertainly.

Stay safe.

Mark F. Wille is the president of his namesake firm.