Regardless of industry, financial condition, supply chain and distribution logistics, workforce composition, etc., all companies are currently facing a variety of financial reporting and accounting challenges. The challenges are prevalent in most companies to varying degrees.
Let’s take a quick look at the financial reporting and accounting challenges that are top of mind for many companies right now.
Companies continue to face challenges related to forecasting as a result of the ongoing uncertainties associated with the COVID-19 pandemic. Looking across the economic landscape, one might observe a tale of two markets: companies that are being challenged to get back to pre-outbreak operations and those that are benefiting from the outbreak.
For many of the companies negatively affected by COVID-19, it’s been observed the development of forecasts that use pre-COVID-19 results as an initial target on which such companies have based their assumptions for the resumption of “normal growth.” However, it’s believed that companies should ask themselves whether achieving pre-COVID-19 results in the near term is reasonable or whether they are facing a “new normal” given the potential continuation of the existing economic environment or a permanent shift in their business models introduced by the pandemic.
In thinking about both a new normal and future trends, some companies are evaluating whether customer preferences have shifted in such a way that they most likely will not reach the same performance levels they achieved before the outbreak. Other companies that may be benefiting currently are assessing whether they will continue to outperform in future periods or revert back to historical performance.
With all the unknowns and uncertainties, including the timing and pattern of economic recovery, it’s been noted that more companies are preparing multiple forecasts with different recovery scenarios and are probability-weighting the likelihood of each outcome. This can be done using innovative tools like DataRails. In addition, with the increase of liquidity challenges and shortfalls of capital resources, many companies have enhanced their focus on forecasting cash position and cash flows rather than allowing cash flow estimates to be simply derived on the basis of forecasted operations.
Transparency is key. When it comes to disclosure and communication, we’ve all heard about the importance of transparency. And in the current COVID-19 environment, the need for transparent communication is magnified.
Regarding required disclosures, many companies have unusual or nonrecurring activities related to COVID-19 that result in various expenses (e.g., restructuring, severance, impairments, modifications of stock awards). They may have also received government assistance or insurance recoveries. Companies’ disclosures about these types of activities should be robust and should describe the accounting treatment used as well as how such items are presented in the financial statements.
The SEC recently emphasized the importance of robust disclosures and issued disclosure guidance related to COVID-19 that, among other items, encouraged registrants to disclose how a company is dealing with short-term and long-term liquidity and funding risks in the current environment, particularly if funding sources and efforts present new risks or uncertainties to a company’s business.
Internal control environments continue to become increasingly complex as companies navigate the impacts of COVID-19. While some aspects of such environments may have changed during the COVID-19 pandemic, the requirement for effective internal controls over financial reporting (ICFR) under the Sarbanes-Oxley Act has not changed, and regulators continue to focus attention on, and emphasize the importance of, such controls. Accordingly, companies should not lose sight of what is appropriate for effective ICFR versus what may be considered “normal” or “common” practices for dealing with the challenges of the COVID-19 pandemic, if such practices are not effective.
Entities must carefully consider their unique circumstances and risk exposures when analyzing how recent events may affect their financial reporting. Specifically, financial reporting and related financial statement disclosures need to convey all material current or potential effects of COVID-19.
In addition, entities should consider the increasingly broad effects of COVID-19 as a result of the negative impact it has had on the global economy and major financial markets.