As we continue to battle the uncertainties of the coronavirus pandemic (COVID-19), economic and business disruptions have been prevalent. They directly impact various aspects of an entities’ operations (production and supply chain disruptions, loss of major customers, closures of locations, employee lay-offs, furloughs, and work restrictions, decrease in consumer spending, among others). All of these impacts and events have raised significant concerns on liquidity to an entity’s financial and operational performance.
Why is it important?
While the COVID-19 impacts can affect numerous areas in the financial statements, entities will still need to disclose and potentially account for subsequent events and any major impacts resulting from the pandemic in each of the affected financial statement areas. While the World Health Organization (WHO) only announced the COVID-19 outbreak as a global health emergency in January 2020 and then, a pandemic in March 2020, any major business and economic events caused by COVID-19 should be assessed as a subsequent event in an entity’s financial statements (Accounting Standards Codification Topic 855, Subsequent Events).
The identification and assessment of subsequent events commence at the reporting date and entities have a continued responsibility to perform their procedures until their financial statements are issued (or available to be issued). Entities will need to consider not all, but those subsequent events significant to users of the financial statements. There are two types of subsequent events.
For entities with a calendar year ending December 31, 2019, or earlier, most subsequent events related to the impacts from COVID-19 will likely be Type 2, such as the following examples:
Because of the continuous changes and impacts from the COVID-19 pandemic, that may affect numerous areas in the financial statements, the application of the subsequent events accounting standard could be challenging for entities. Care must be exercised to ensure that financial statements are not adjusted for events and conditions that did not exist as of the reporting date. However, to prevent the financial statements from being misleading, additional information that reflects significant new events or conditions should be assessed for disclosure in the financial statements. Things to consider are:
- Are the events or conditions related to the COVID-19 pandemic (e.g., lawsuit or bankruptcy of a customer, etc.) providing additional evidence about conditions that existed at the reporting date? All information that becomes available before the financial statements are issued or available to be issued should be considered in the assessment of the conditions on which financial statement estimates are biased because these events could represent the culmination of conditions that existed over an extended period and could have existed before the reporting date. Consequently, these could very well be concluded as Type 1 events.
- The pace of the spread of COVID-19 after the reporting date may not necessarily provide additional evidence about conditions that existed at the reporting date. Significant judgment may be required to assess certain events that occurred after the reporting date to correctly distinguish between the impacts directly related to the COVID-19 pandemic and other conditions that may have existed at the reporting date. For instance, an employee legal matter that occurred after the balance sheet date may be attributable to factors that are unrelated to the COVID-19 pandemic.
- In periods ended just before and after the COVID-19 outbreak, the potential accounting implications are more extensive and may require more that is beyond just disclosure. Entities should assess the impact on both the recognition and measurement of any significantly affected amounts and related financial statement disclosures.