It is nearly impossible to see a future without the residual effect of the COVID-19 outbreak, as the economy continues to respond to rapid changes in consumer behavior and supply chain operations. Travel bans have been imposed on millions of people and many countries have placed quarantine measures on their entire populations. Businesses are dealing with lost revenue and disrupted supply chains and there has been significant volatility in financial markets.
One issue cannot outweigh the rest during times like these. As the health and safety of people around the world remain the top priorities of every organization, leaders must also keep their focus on employee retention and organizational strategy. In response, many governments around the world have already announced measures to provide both financial and nonfinancial assistance to disrupted industry sectors and affected business organizations.
In these circumstances, transparency is as important as ever. People must be able to rely on your organization’s ability to provide reliable information in order to regain trust in your business and the economy as a whole. The impact on financial reporting may not be the first thing that comes to mind as a consequence of the outbreak, but there is an important and challenging role here for preparers of financial statements, audit committees, and auditors.
In order to keep your company out of trouble with the IRS, we recommend paying attention to further regulatory updates and continuing to monitor the current and potential effects that the coronavirus will have on their financial reporting. There will be a number of areas for discussion, but three issues will be priorities: liquidity reporting; contract modifications; and government assistance, and income tax laws.
1. Liquidity reporting
The key component to surviving the economic downturn caused by the coronavirus is maintaining the highest level of cash flow possible. As a leader this means asking the question, does our company have enough cash to survive the next 6 to 12 months?
When preparing financial statements, management must assess the company’s ability to continue as a going concern, and whether the going concern assumption is appropriate. In the current circumstances, management will need to consider the existing and anticipated effects of the coronavirus outbreak on activities in its assessment.
Given the volatile nature of the current situation, it’s important to make a note of material uncertainties that cast doubt on the company’s ability to operate under the going concern basis. If a company still decides to prepare the financial statements under this assumption, it must disclose these uncertainties.
2. Contract modifications
Some of the most significant effects of COVID-19 for most organizations are the disruption of operations, increased operating costs, and the potential for lost revenues. These companies may need to obtain additional financing, amend the terms of debt agreements or obtain waivers if they no longer satisfy debt covenants. In such cases, they will need to consider whether any changes to existing contractual arrangements represent a substantial modification or potentially a contract extinguishment.
There are also consequences for lenders. Financial institutions, such as banks and insurance companies, are being asked to help borrowers by providing relief on cash-flow obligations. These will be considered contract modifications and will require institutions to think about the measurements of their loan portfolio and expected credit losses. Similarly, real estate companies will have to consider the consequences if they provide relief to lessees on rents.
3. Government assistance and income tax
Support measures for individual industries, along with wider economic stimulus packages, have been some of the most publicized components of the government response to the coronavirus outbreak over the last several months. The measures being taken to stimulate our economy include direct subsidies, tax exemptions, tax reductions and credits, extended expiry period of unused tax losses, reduction of public levies, rental reductions or deferrals, and low-interest loans.
All of these programs will have an impact on how organizations report their financials for the current fiscal year. While relief measures will likely fall within the common standards for income taxes, government grants, and leases, or financial instruments, the accounting may be different in each case.
One important factor to consider when accounting for any income tax consequences is whether the government concerned has substantively enacted the relevant law. Organizations must determine whether changes to tax rates and laws were substantively enacted as of the reporting date. The characteristics of any tax relief or rebates need to be assessed to determine whether they should be accounted for as a reduction to income tax expense or the receipt of a government grant.
In order to avoid these key reporting issues caused by COVID-19 and the repercussions of each, we recommend setting up a consultation with a tax advisor. Contact us at Milikowsky Tax Law to learn more about our services!
