How Corporate Finance Can Handle Coronavirus Challenges | Article
Additionally, the challenges of new accounting standards have become even more daunting in this environment, as CECL implementation, revenue and leases are still short-term for many businesses that may not have the resources. necessary to do the job.
How companies’ finance teams respond to all of these challenges can have a significant impact on how companies emerge from the pandemic.
“Accounting departments and control functions are always seen as providers of numbers and valuable business advice, but they’re even more in the spotlight right now,” says Steve Barta, partner in the Audit practice. and certification from Deloitte & Touche. “They must provide immediate information on the various trading alternatives and financial reporting implications, as well as accounting for infrequent and new transactions resulting from the coronavirus.
Barta shares these key areas that finance executives are currently facing where additional attention may be needed.
Deficiency. “Many companies are used to dealing with impairment issues for goodwill, intangibles and fixed assets, but the whole left side of the balance sheet needs to be tested for impairment,” Barta says. “Companies need to know which accounting standards apply, master all the models, prioritize their analyzes and identify where they need help.” He suggests that it is very difficult to estimate cash flows for valuations at this time given the uncertainties of government actions, the timing of the lifting of restrictions and the economic recovery.
Revenue. “What we’re seeing now more than ever is companies changing their contracts to keep everything going with their suppliers and customers, like alleviating penalties and minimum quantities,” Barta said. “The key is to assess whether these are contract modifications under ASC 606, or simply compliance with the terms of the existing contract.” A general question to consider is whether the pandemic qualifies as a “force majeure” event under existing contractual language.
Debt. Similar to revenue contracts, changes to debt agreements should be evaluated to determine whether they are modifications or extinguishments under accounting guidelines. “There are many financial instrument and debt issues under the CARES Act, especially for small businesses getting new SBA loans,” Barta says. “The structure of these is unique because some of the loans are forgivable, and these must be assessed for form versus substance based on the intent of the CARES Act.” There is no guidance in US GAAP that specifically addresses the accounting for a repayable loan from a government entity, and companies may have to look to the government grant accounting contribution model.
Investments. Barta recommends companies take an inventory of all their investments and determine which of the different depreciation models applies to each one. “Investments that don’t have an easily determinable market value are more difficult to value because they must be assessed now and periodically for depreciation,” he says. “Getting the depreciation analysis right is important because once you write these investments down, you usually can’t revalue them absent a market transaction.”
Internal controls. As companies learn to operate in a remote environment, they face unique internal control issues. “Some people may not be able to do their usual check-ups because they are sick, a family member is sick, they are homeschooling their child, or they don’t have access internet and can’t 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.
Disclosure of Financial Statements. “A question I often get 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 at this time because the coronavirus pandemic has created unprecedented new problems.” He 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 take care of all of this on their own, Barta recommends that finance managers engage their auditors, accounting advisors, and other professionals for advice. “There is no limit to the circumstances in which companies can reach out,” suggests Barta.