It’s a new year and the time when many people reflect on the past year and plan for the new one, often making resolutions to improve, leave behind the bad, and start anew. While I welcome 2021 with open arms and was happy to kick 2020 to the curb, I know for many accountants, there is still a lot to be done to close out 2020.
It is the busiest time of year again for many accountants – year-end accounting and reporting time! And this year-end, in addition to the typical accounting and reporting busy-ness, companies will need to consider the accounting implications of COVID-19.
During 2020, we conducted a number of webinars for regional accounting firms and companies regarding accounting issues arising from COVID-19. In this post, we cover our top 5 COVID-19 issues to consider, especially as you embark on, or are in-the-midst of, year-end accounting and reporting.
Non-financial Asset Impairments
Non-financial asset impairment accounting is one of our top 5 COVID-related issues to consider for obvious reasons, such as the pandemic-related required and voluntary business closures, the widespread decline in economic activity, decreased revenues and other business disruptions.
In accordance with ASC 360, Property, Plant and Equipment, triggering events are used for the testing of impairment of long-lived assets and finite-lived intangible assets. A triggering event is an event or change in circumstances that would more likely than not reduce the fair value of an asset below its carrying amount. Companies need to assess the impact of the pandemic and determine whether it is a triggering event that would lead to required impairment testing under ASC 360.
Also, don’t forget the impairment testing requirements under ASC 350, Intangibles – Goodwill and Other, for goodwill and indefinite-lived intangible assets. While these are required to be tested for impairment on an annual basis, remember that more frequent impairment testing is required if impairment indicators (such as the impacts of COVID-19) exist.
If you determine that the impact of COVID-19 is a triggering event requiring impairment testing, check out our blog, Triggering Event? Let’s Get Off Our Assets and Assess for Impairment, to refresh your accounting knowledge and ensure you follow the correct order in which assets generally needed to be tested.
Exit or Disposal Activities
The hardship, economic uncertainty, and government mandated closures stemming from COVID-19 have resulted in company reorganizations, closure of facilities, sale or abandonment of assets, reduction of their workforce, or other restructuring activities.
You can look to ASC 420, Exit or Disposal Cost Obligations for guidance on accounting for restructuring activities. Additionally, ASC 712, Compensation – Nonretirement Postemployment Benefits provides guidance on certain termination benefits. You can also read our blog post, Planning a Restructuring? Here’s a Refresher Of ASC 420 and ASC 712, for further insights.
There has been an increase in layoffs due to the pandemic. For involuntary termination benefits, it is critical to determine whether the termination benefits are one-time or contractual. While COVID-19 related layoffs most likely will fall under one-time termination benefits, the details of the restructuring plan must be understood to apply the appropriate guidance and conclude on the appropriate timing of liability recognition.
Fair Value Measurements
Fair value measurements are found throughout the financial statements and the accounting for non-financial asset impairments, and exit or disposal activities that we just discussed are two of those accounting areas where fair value measurement accounting is applied.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
An orderly transaction and use of market participant assumptions are two key foundational principals of fair value.
Due to COVID-19, companies may encounter changes in activity and volatility in the markets that could impact their fair value measurements. Careful consideration must be given to the guidance on inactive markets as markets often remain active and orderly even during times of disruption.
Additionally, companies may need to reassess the inputs and significant assumptions of their fair value measurements especially for Level 2 and Level 3 measurements.
There has been an increase in the number of debt restructurings as a result of the pandemic.
When a debt arrangement is restructured, it is either considered a troubled debt restructuring (TDR) or a regular restructuring (which includes both extinguishments and modifications). It is important to distinguish between a “regular” debt extinguishment or modification and a ‘troubled debt restructuring” because the accounting under U.S. GAAP is different.
Regular debt extinguishment or modification falls under ASC 470-50, however, you would need to look at the guidance under ASC 470-60 for a troubled debt restructuring,
The last of our top 5 COVID accounting issues is going concern. U.S. GAAP presumes that a company will continue as a going concern unless (and until) the company’s liquidation becomes imminent.
Unfortunately, COVID impacts are taking their toll on many businesses which could impact continuation as a going concern. Management is required to evaluate whether there are conditions and/or events that raise substantial doubt about its ability to continue as a going concern within one year after the date on which the interim or annual financial statements are issued.
For further information on the going concern accounting requirements, take a look at our blog, Reminders About the Requirements of ASC 205-40, Going Concern.
These are 5 key accounting issues for you to consider as you close out the accounting and reporting for 2020. There are others to consider as well. As I mentioned earlier, we have training on accounting issues arising from COVID-19 which we have been conducting via webinars for companies and regional accounting firms. Unfortunately, COVID-19 is still causing disruption and although the vaccine is here, these COVID-related issues as well as others we did not have time to discuss, may continue to impact our accounting throughout this year.
If additional training is something you feel will benefit your organization, please reach out to us via our contact form or call us at 804-897-0608 and we would be delighted to help. Additionally, we have bundled 7 of our online courses in a COVID-19 Course Collection (for a total of 8.5 CPE credits) at an unbeatable discount that provides you with an in-depth understanding of certain COVID-19 related accounting issues to help you accurately report (or audit) financial results under U.S. GAAP in these uncertain times.
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