FINANCIAL REPORTING: Coronavirus May Cause Complications for Some Entities

Cash

For entities with operations in heavily affected areas, any restrictions on financial transfers that arise may make it appropriate to consider cash as “restricted cash” for financial reporting purposes, along with further disclosures relative to the reporting entity’s potential lack of access to the restricted cash.

Receivables

Customers in coronavirus-affected areas may be slower or less likely to pay, invalidating previous assumptions about a company’s ability to collect (such as aging strata, payment history, etc.).

Inventory

Due to potential disruptions to manufacturing and transportation into and out of coronavirus-affected areas, the net realizable value of inventory may become lower than cost because of issues such as quarantine, spoilage, or civil unrest.

If inventory were to be quarantined or inaccessible to a reporting entity, it may be appropriate to classify as a long-term asset on the balance sheet the portion of the inventory not reasonably expected to be realized in cash during a “normal operating cycle.”

Property and equipment

A quarantine or other coronavirus-related triggering event may necessitate testing for the recoverability and impairment of property, plant, and equipment (PPE). Appropriate disclosure may also be required.

Intangibles

Events in coronavirus-affected areas may cause intangibles to be impaired.

Accruals

New costs or obligations incurred due to the coronavirus may lead to additional accruals or changes in existing accruals. For example, there could be incremental costs incurred to re-position and re-deploy equipment from coronavirus-affected areas.

In addition to disclosure related to coronavirus-related accruals, consider contingency/uncertainty disclosure in the notes section of financial disclosures.

Revenue recognition

Events in coronavirus-affected areas, such as quarantines and the shutdown of transportation networks, could adversely affect the way that revenue is recognized. This may impact revenue that is generated in coronavirus-affected areas. Further, disruptions in the supply chain could impact inventory volume and therefore the ability to generate sales at levels previously achieved outside of the coronavirus-affected areas.

Subsequent events

Consider including any disclosures of subsequent events in the notes to the financial statements (in accordance with guidance included in Accounting Standards Codification 855, “Subsequent Events”).

Disclosures/concentrations

Reporting entities should consider whether events in coronavirus-affected areas prompt additional risk disclosures.

Those with exposure to the coronavirus-affected areas are encouraged to consider including contingency/uncertainty disclosures in the financial statements regarding issues such as potential losses or impairments, supply chain disruption, or revenue declines.

Going concern

A reporting entity’s exposure to coronavirus-affected areas may raise or contribute to other existing facts and circumstances that collectively raise substantial doubt about the entity’s ability to continue as a going concern. The various factors in U.S. GAAP (ASC 205-40) and U.S. GAAS (AU-C 570) or PCAOB (AS 2415) may be considered.