While coronavirus, COVID-19, continues to impact companies and organizations in the short-term, the long-term impacts remain largely unknown. Companies should exercise prudence in their accounting and financial reporting functions and the regularly review resulting analysis that identifies financial, operational and compliance risks.
Why is it important?
COVID-19 has the possibility to impact both existing and future customer contracts. Accounting Standards Codification Topic 606 (“ASC 606”), Revenue from Contracts with Customers requires a five-step process for revenue recognition. The COVID-19 pandemic could affect various aspects of an entity’s revenue recognition. Below are some of the anticipated impacts on revenue recognition that may require additional assessment due to the COVID-19 pandemic (the list is not all-inclusive):
Due to business disruptions resulting from the COVID-19 pandemic, entities may be prevented from executing customer arrangements following their normal business and historical practices, which may raise the question as to whether they have enforceable rights and obligations. Furthermore, because their customers may experience liquidity issues due to financial challenges, entities should consider revisiting their procedures for collectability assessments of their receivables from their customers, as well considering changes in the process used to estimate variable consideration.
The degree of uncertainty brought about by the COVID-19 pandemic may also result in entities experiencing challenges when making critical accounting estimates affecting revenue recognition. Consequently, entities should consider disclosing significant judgments made when accounting for their revenue recognition. For instance, estimating probability of collection of receivables; assumptions in the estimation and related constraints applied to variable consideration; estimating price concessions, discounts, returns, refunds, and other similar items affecting transaction price; measuring progress towards completion of a performance obligation recognized over time; and other significant assumptions or changes in assumptions.
Many of the anticipated situations above resulting from the COVID-19 pandemic may require the Company to not only assess accounting implications on revenue recognition but also to evaluate the sufficiency of their financial statement disclosures. For example, disclosures of significant changes in a contract asset due to an impairment, significant financing components due to significant changes in payment terms, disclosures associated with variable consideration estimates and changes, and the timing of revenue recognition for their remaining performance obligations.