COVID-19 calls for dynamic diligence and disclosure in financial reporting
Financial reporting has always required accuracy, acumen and adherence to rules, but COVID-19 is putting those skills to the ultimate test. With the third quarter coming to a close, and the course of both the pandemic and the economy in question, companies across every industry are contending with compounding challenges ranging from estimates to eligibility for government relief programs.
The road ahead is unclear, but the steps are tried and true: Thorough recordkeeping, sound judgment and continued transparency and flexibility will be even more critical for financial reporting resilience and confidence in the capital markets as we move forward.
Diligence in recording
Liquidity is at the top of nearly every CFOs’ priority list, particularly during times of crisis. Even as additional government relief programs continue to be debated, many companies are sorting through their cash needs, options, and — for those that have already secured loans through the Paycheck Protection Program or other programs — how to responsibly record and use those funds. If companies pursue government relief programs — whether through loans, reimbursement or tax benefits — there are critical recordkeeping responsibilities that come with them.
Companies will need to document any programs they participate in, determine eligibility and use requirements that must be tracked and reported, and assign responsibility for recordkeeping of any actions taken under each program. They should also designate a senior leader to consider the long-term impacts on broader business decision-making and flexibility that certain loan programs could have.
While there is uncertainty about whether loans will be audited, and if so, at what threshold, companies should be prudent and expect to be subject to audit and proof-of-eligibility requirements to receive loan forgiveness or avoid penalties.
Transparency in disclosures
The Securities and Exchange Commission expects companies that have received assistance to provide disclosure regarding the sum, as well as the short- and long-term impact on their financial condition, results of operations, liquidity, and capital resources within management’s discussion and analysis.
These disclosures must also evolve if companies secure additional outside funding or government loans, and make other decisions for sustainability. For example, as companies modify contracts, shift supply chains, adjust staffing levels or refocus revenue streams, they must track and report the impacts to estimates, impairment and valuation analyses. A report from the Corporate Governance Research Initiative at the Stanford Graduate School of Business and the Rock Center for Corporate Governance at Stanford University found that 99.4 percent of the 3,644 public companies they analyzed made some type of disclosure related to COVID-19 between January and May. References to COVID-19 were most frequently noted in the forward-looking statements disclaimer, followed by disclosures related to cash, sales, supply chain and debt.
Following this surge of new disclosures, in March and June , the SEC’s Division of Corporation Finance issued guidance to help companies provide COVID-19 impact disclosures on matters that may be material to investors, including access to credit, ability to service debt, reliance upon key customers or suppliers and ability to continue as a going concern.
Transparency is critical, but so too is consistency of language and organization to ensure investor comprehension and comparability. To help, the Financial Accounting Standard Board recently released guidance clarifying how to apply the U.S. GAAP Financial Reporting Taxonomy to disclosures addressing COVID-19 and related financial relief in key areas, including income and payroll taxes, loans, grants and overall discussions of the pandemic.
Responsibility for financial reporting is not limited to the finance department and auditor. Boards of directors are also particularly keyed in on financial reporting issues and transparency during this time. A recent BDO survey of 280 public company board directors found that nearly three in four had increased disclosures around new or emerging risks to their business, and 46 percent increased the time and effort devoted to accounting estimates in forecasts.
The situation is evolving
At this point, nearly every business has asked their employees or customers for patience with policy, reopening or protocol changes because the course of the pandemic is unpredictable. Financial reporting will be no different. Businesses will need to apply that same patience and flexibility to their recording and reporting processes, as it’s likely the coming months will bring further guidance, reassessment or reinterpretation of rules from the IRS, FASB, the American Institute of CPAs, government agencies and more.
The best way to prepare for new or altered guidance is with diligence in both documentation and disclosures.