Your organization could incur significant costs due to the current and future impacts of COVID-19. Understand how expenses and any recoveries, such as insurance policy payments, should be recorded within an income statement, and move forward with confidence.
Do you have questions on how expenses are recorded, impairment concerns due to decreased revenues, or treatment of insurance policy payouts for disrupted business operations? Contact us.
Costs incurred in response to COVID-19 may include:
- Pandemic planning expenses
- Increased screening of all visitors and guests
- Additional security and/or staffing
- Cancelation of events
- Production delays due to supply chain interruption
- Expenditures to move students out of dorms and convert college and university classes to online formats
- And many others
Entities reporting under FASB
- Expenditures incurred in response to COVID-19 considered “unusual” and/or “infrequent” should likely be presented in the income statement as a separate component of income from continuing operations. Industries, such as health care entities, with a performance indicator must reflect these expenses above the performance indicator.
- Disclose the nature and circumstances of these expenditures in the financial statements. Also disclose any operational risk or concerns related to possible future effects.
- If financial statements have not been issued for your most recent year-end and there is expected significant impact on operations, a subsequent events disclosure is likely required.
Technical guidance for treatment of expenditures
“Unusual” or “infrequent”
In 2015, the Financial Accounting Standards Board (FASB) released standards that eliminated the concept of extraordinary items, simplifying income statement presentation. This meant entities were no longer required to separately classify, present, and disclose extraordinary events and transactions. FASB concluded that this change would not result in a loss of information because, although reporting entities no longer needed to consider whether an underlying event or transaction is extraordinary, the entities still need to present and disclose items that are unusual in nature or occur infrequently.
- An event or transaction considered “unusual” has a high degree of abnormality and is clearly unrelated to (or only incidentally related to) the entity’s typical and ordinary activities, taking into account the operating environment.
- “Infrequent” refers to events and transactions that would not reasonably be expected to recur in the foreseeable future, taking into account the operating environment.
- An entity’s operating environment refers to the characteristics of its industry, the geographical location of its operations, and the nature and extent of governmental regulation. Defining the operating environment helps determine whether an event or transaction is abnormal and significantly different from the entity’s typical activities (FASB ASC 220-20-55-1). For example:
- A past event experienced by an entity, such as a natural disaster or industry volatility, provides evidence to assess the probability of it occurring again in the foreseeable future. In this way, the probability of recurrence takes the entity’s operating environment into account (FASB ASC 220-20-55-2).
Income statement presentation
Material events or transactions that are considered “unusual,” “infrequent,” or both, should be presented in the income statement as a separate component of income from continuing operations. Unusual or infrequently occurring items should not be presented net of income taxes on the face of the income statement (FASB ASC 220-20-45-1).
Additionally, the financial effect of each event or transaction that is unusual in nature or occurs infrequently, or both, should be presented as a separate component of income from continuing operations or, alternatively, disclosed in the notes to the financial statements (FASB ASC 220-20-50-1).
If subsequent events occurred before the entity releases its financial statements for a certain year or period, the entity may need to disclose the events in their financial statement prior to issuance. Events that provide evidence about conditions that did not exist at the balance sheet date but arose after that date must be disclosed in that entity’s financial statements (FASB ASC 855-10-20).
If a governmental or nonprofit organization’s mission or charter includes responding to natural disasters or infectious disease outbreaks, this may be considered part of “normal operations” and would not be an unusual or infrequent event.
You may have business interruption insurance policies. When incurred damages or losses have been mitigated through insurance, accounting treatment through FASB ASC 450, Contingencies, is appropriate. FASB ASC 450 has strict rules related to the recognition of gain contingencies (in this case, insurance proceeds). Often, these gains are recognized in periods after the corresponding expenses (premiums) were paid.
If a potential insurance policy payment or recovery is probable, you should recognize a receivable to the extent that the amount of losses has been recognized in your financial statements. Any recoveries in excess of incurred losses should not be recorded, and these are realized or realizable as defined by FASB ASC 450. This generally occurs when the insurance company is processing the claim and has provided conclusions in written form. As with most gain contingencies, treatment and recording is not always an easy answer and requires thorough analysis of all facts, insurance policies and contracts, and possible confirmation with legal counsel.
How we can help
As you face challenges now and in the months ahead, CLA is here to assist you. Whether it be through questions on how expenses are recorded, impairment concerns due to decreased revenues, or treatment of insurance policy payouts for disrupted business operations, we are here to help. Please contact us today.