Accounting and Financial Statement Guidance
Impact of COVID-19 on Going Concern
- Review how the coronavirus pandemic could affect going concern assessments.
- During times of extreme uncertainty, it is important to understand and model the impact.
- Organizations in certain industries need to be aware of regulatory and compliance requirements.
The coronavirus (COVID-19) pandemic is a tragedy that’s overwhelming much of the health care system and wreaking havoc on nearly all organizations. Additionally, the exponential nature of the COVID-19 spread means that havoc is hitting us all hard and fast, causing organizational leaders to experience whiplash with each new development.
For most organizations, the main immediate concern is liquidity and the longer-term concern is what it might look like when we bounce back to the new reality. With this in mind, leaders are still wrestling with a number of related questions:
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- How severe and how long will the economic dip be from COVID-19?
- Can we take advantage of loan and grant programs to help with the dip?
- How quickly can we turn back in a positive direction?
- Will there be any surge from our current backlog of orders?
- What will the new normal look like?
However, while you may be focused on the future, don’t lose sight of the impact this uncertainty could have on your historical financial statements.
Going concern assumption
Financial statements are generally prepared under the assumption an organization will continue as a going concern for a reasonable period of time. Since the alternative is assuming an organization is liquidating, it is a good thing for an organization to be a going concern.
There are, however, conditions and events that may raise doubts about your organization’s ability to continue as a going concern. Examples include the following:
- Inability to meet current obligations
- Failure to comply with debt covenants
- Significant declines in revenue
- Insufficient or negative cash flow from operations
Unfortunately, with COVID-19, historically strong organizations are suddenly experiencing one or more of these conditions.
What are my options?
First and foremost, focus on your response to the crisis and on keeping your organization as strong as possible. This means:
- Understanding the financial impact of COVID-19
- Obtaining emergency loans and grants as appropriate
- Taking any other necessary actions
Next, consider the impact on your historical financial statements, and follow these practical steps:
- Understand the look-forward period is one year from the date the financial statements are issued.
- Review financial covenants in debt agreements applicable during the look-forward period.
- Summarize major obligations that may come due within the look-forward period.
- Prepare a forecast that takes into account the COVID-19 impact on net income, cash flow, and key ratios.
- Determine if any conditions raise substantial doubt about your organization’s ability to continue as a going concern during the look-forward period.
After going through those steps, if there are any conditions that do raise substantial doubt, consider these options:
- Most of the time, the organization can describe the conditions and management’s plans in the financial statements.
- In certain industries, though, the impact of COVID-19 may be so extreme that the best option may be to delay issuance until the organization can better understand the significance of current events.
- However, delaying issuance may not be possible for organizations with regulatory or other compliance deadlines. So when the impact is extreme and unpredictable, but an organization can’t delay issuance, the auditor may consider modifying its report to acknowledge this.
Although no one looks forward to any of these options, they likely won’t be a surprise to anyone reviewing the financial statements. Furthermore, most users of the financial statements want management to be open and honest. Addressing the impact of COVID-19 head on and explaining the potential impact and management’s response plans likely is the best approach to take.
How we can help
Financial accounting standards state management is ultimately responsible for making these determinations. However, management doesn’t have to do it alone.
- CLA Intuition 2.0 can help model the financial and cash flow impact of COVID-19
- CLA professionals can help you evaluate and navigate through various loan and grant programs
- Your engagement team can help you work through the impact of COVID-19 on the going concern assumption
Please contact your CLA representative anytime for more information. We’re here to help you through this complex, rapidly changing environment.