finances

Beware: Coronavirus may affect financial reporting

The coronavirus (COVID-19) outbreak — officially a pandemic as of March 11 — has prompted global health concerns. But you also may be worried about how it will affect your business and its financial statements for 2019 and beyond.

Close up on financial reporting

The duration and full effects of the COVID-19 outbreak are yet unknown, but the financial impacts are already widespread. When preparing financial statements, consider whether this outbreak will have a material effect on your company’s:

  • Supply chain, including potential effects on inventory and inventory valuation,
  • Revenue recognition, in particular if your contracts include variable consideration,
  • Fair value measurements in a time of high market volatility,
  • Financial assets, potential impairments and hedging strategies,
  • Measurement of goodwill and other intangible assets (including those held by subsidiaries) in areas affected severely by COVID-19,
  • Measurement and funded status of pension and other postretirement plans,
  • Tax strategies and consideration of valuation allowances on deferred tax assets, and
  • Liquidity and cash flow risks.

Also monitor your customers’ credit standing. A decline may affect a customer’s ability to pay its outstanding balance, and, in turn, require you to reevaluate the adequacy of your allowance for bad debts.

Additionally, risks related to the COVID-19 may be reported as critical audit matters (CAMs) in the auditor’s report. If your company has an audit committee, this is an excellent time to engage in a dialog with them.

Disclosure requirements and best practices

How should your company report the effects of the COVID-19 outbreak on its financial statements? Under U.S. Generally Accepted Accounting Principles (GAAP), companies must differentiate between two types of subsequent events:

  1. Recognized subsequent events. These events provide additional evidence about conditions, such as bankruptcy or pending litigation, that existed at the balance sheet date. The effects of these events generally need to be recorded directly in the financial statements.
  2. Nonrecognized subsequent events. These provide evidence about conditions, such as a natural disaster, that didn’t exist at the balance sheet. Rather, they arose after that date but before the financial statements are issued (or available to be issued). Such events should be disclosed in the footnotes to prevent the financial statements from being misleading. Disclosures should include the nature of the event and an estimate of its financial effect (or disclosure that such an estimate can’t be made).

The World Health Organization didn’t declare the COVID-19 outbreak a public health emergency until January 30, 2020. However, events that caused the outbreak had occurred before the end of 2019. So, the COVID-19 risk was present in China on December 31, 2019. Accordingly, calendar-year entities may need to recognize the effects in their financial statements for 2019 and, if applicable, the first quarter of 2020.

Need help?

There are many unknowns about the spread and severity of the COVID-19 outbreak. We can help navigate this potential crisis and evaluate its effects on your financial statements. Contact us for the latest developments.

© 2020

Month End Accounts and Reconciliations

Quick tips for a more efficient and effective close.

 

By Jeremy Myers, CPA

Audit Supervisor at Atchley & Associates, LLP

 

Businesses, much like your personal finances, balance their books on a monthly basis, or they should. The month end close process of reconciling bank accounts or even credit cards accounts are typically the last item that gets reconciled and closed each month.  This process insures that you have recorded all of the bank transactions such as bank fees or ACH payments/deposits that your business did not already have a paper form of payment.  Also in the sense of reconciling your business’ credit card bill to insure all the charges are proper, have support (receipts kept and attached to the statement), and that no unknown or possible fraudulent charges have made your statement with the end result of showing the complete liability for items that you have not yet paid for. For any control based procedure there is a need to insure the procedure is being performed timely and accurately.

Now that most statements are available online complete the next day after the statement close, the timeliness of the reconciliation can be taken out of the equation.  You just need to set up a schedule and by X day of the month, each month, every month, the account gets reconciled and any entries for transactions that have happened get put into the accounting system.

The other main attribute for effective procedures is accuracy and this attribute is just as much about transcribing the numbers from the statement in to the accounting system as it is as making sure you are reconciling the account to the proper date.  Most bank accounts, unless asked for otherwise, are set up based on the day of the week you opened the account.  For personal use, this might not be a bad thing, however, for businesses, most do not have mid-month closing dates.  Our biggest recommendation is make sure that your statements: bank, investments, credit card, etc… are on a month end basis.  That way you know you are reconciling your statement to each month end, and most importantly, year-end (as each of the months close into the end of the year).  This can be accomplished by simply calling your banker, investment advisor, credit card dealer, etc… and asking them to change your statement to a month end basis; this should cover the months that end in 28, 29, 30, or 31 days.

By performing your reconciliations timely and at the appropriate end date (typically month and year end) you can insure all of the transactions occurring during the month are appropriately recorded in your businesses’ records and for those pesky accruals, you can accrue an entire credit card statement instead of trying to add up the certain transaction that occurred prior to the end of the month.