Webinar: Financial Reporting Considerations Surrounding ......SEC on Financial Reporting • In light of the significant impacts of COVID- 19, the SEC has placed great stress on the

Financial Reporting Considerations Surrounding COVID-19

Miguel VelasquezPrincipal

Jesus SocorroManaging Principal

Risk & Transaction Advisory Practice

Emma FloreaPrincipal

Dennis BartoeSenior

Agenda

• COVID-19 Financial Reporting Considerations• SEC Update• Financial Reporting Reminders for 2020

COVID-19 Financial Reporting Considerations

Accounting Considerations Surrounding COVID-19

• Goodwill, Indefinite-Lived Intangibles, and Long-Lived Assets

• Fair Value Measurements of Financial Assets• Inventory• Revenue Recognition• Tax Considerations• Lease Accounting – Impairment and Modifications• Debt Covenants and Modifications• Subsequent Events and Going Concern Considerations

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ASC 360 Impairment Model

• This trigger-based test occurs at the asset group level, and is inclusive of PP&E, finite-lived intangible assets, and ROU lease assets.

• The impairment analysis is done in 2 steps:– 1. Assess recoverability of the asset group through comparing

the undiscounted cash flows to the carrying value of the assets.– 2. If the carrying value exceeds the undiscounted cash flows, a

fair value test must be performed which looks at the value of the asset group from a market participant perspective.

• A list of potential triggering events are included under ASC 360, many of which may be present due to COVID-19 concerns.

Nonfinancial Assets

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Is COVID-19 a “Triggering Event” for an Impairment Analysis?

• ASCs 350 and 360 list a variety of indicators to consider in identifying whether an impairment test may be required:

– Macroeconomic conditions (deterioration of the economy, limitations on raising capital, foreign exchange rate fluctuations)

– Industry and market considerations (regulatory/political developments, changes in consumer demand)

– Overall financial performance (negative/declining cash flows, failure to meet forecasted results)

– If applicable, declines in share price (both in absolute terms and relative to peer group)

4

ASC 350 Impairment Model

• Goodwill and indefinite-lived intangible assets are tested annually, or more frequently if there is a triggering event.

– The test focuses on the carrying value of a reporting unit (for goodwill) or an asset (for indefinite-lived intangibles) exceeds the fair value.

• In the wake of COVID-19, there is a general expectation for previous forecasts to be revisited to incorporate impacts on a company’s expected future operating performance.

– Companies should also revisit their reporting unit valuation methodologies in light of the circumstances created by the pandemic.

Goodwill and Indefinite-Lived Intangibles

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Fair Value Measurements and Impairment

Type of Financial Asset Consideration for the Financial Asset

• Assets Measured at Amortized Cost (Loans, held-to-maturity securities, trade receivables)

• If a company has adopted ASC 326, expected losses for the life of the asset are already recognized. Assumptions contemplated on adoption may need to be revisited as a result of Q1 2020 events.

• Available for Sale Securities • If an AFS security’s fair value is below its amortized cost, a credit allowance should be established. Companies will need to determine if this impairment is other than temporary in nature. Companies should also evaluate the likelihood of sale.

• Equity Securities (ASC 320) • Changes in the fair value of equity securities accounted for under ASC 320 are reflected in earnings.

• Equity Securities Without Readily Determinable Fair Values (ASC 321)

• Companies should be privy to any observable transactions. Impairment analyses on equity securities valued under ASC 321 are qualitative in nature.

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Inventory

• With regard to inventory costing, variable production overhead costs are allocated on the basis of actual use of production facilities.

– Deviations from “normal production” should not be reflected in this costing approach. For example, abnormal amounts of freight, handling costs, and spoilage should be recognized as current period charges (as opposed to capitalized as inventory).

• Companies should revisit their inventory reserve calculations to incorporate the impacts of COVID-19.

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Revenue Recognition

• Potential disruption caused by COVID-19 or other economic events

– Consideration of a customer’s inability to make payments– Reassessment of variable consideration– Extended payments terms, price concessions, discounted

goods or services– Contract modifications– Increased volume of returns

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Tax Considerations

• Each reporting date, a company must assess any existing deferred tax assets for the necessity of a valuation allowance. The following factors should be considered in evaluating:

– History of cumulative net losses– Recent operating results– Updates to projections from COVID-19 impacts

• Other considerations: – Estimate forecasted full-year annual effective tax rate (AETR)– Impacts of tax legislation passed in response to COVID-19

enacted after the balance sheet date but before the financial statements are issued

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Lease Accounting

• Amidst the volatile interest rate environment from COVID-19, what should lessees use as a discount rate for valuing new operating and finance leases in Q1 2020?

– Companies are encouraged to continue usage of the incremental borrowing rate despite current economic conditions.

• Are there any differences in accounting for the modification of an operating lease and the impairment of an operating lease?

– Yes. Lessees should follow guidance prescribed under ASC 842-20-35-4 through 6, which requires a revaluation of the lease liability and an update of the discount rate.

– For impairments, lessees should recognize the initial impairment loss as expense. The remaining carrying value of the ROU asset should be amortized on a straight-line basis. The accounting for the operating lease liability will be unchanged.

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Lease Accounting Under Force Majeure Provisions

• Does the accounting for a standard lease modification and the modification of a lease under force majeure provisions differ?

– Yes. Standard lease modifications follow guidance under ASC 842. Changes due to the activation of a force majeure are not modifications per se, and may need to be accounted for as variable lease payments.

• If a lease had an unrelated default covenant initially not included in the measurement of the lease liability and asset, should it be revisited given current events?

– Yes. If and when the default covenant is considered probable, the full amount of the potential default should be reflected in the lease asset and liability on that date.

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Debt Covenants and Modifications

• Companies should continually monitor their compliance with debt covenants amidst impacts from COVID-19.

• Many term loan agreements may include a “material adverse change” clause, which could prompt lenders to put the debt.

• For any debt restructuring arising during this period of time, the borrower should assess whether the restructuring is considered a troubled debt restructuring should be performed.

• For non-TDR debt restructurings related to term loans, the “10% test” should be performed to determine if the restructuring is a modification or an extinguishment.– Change in NPV of cash flows > 10% = extinguishment– Change in NPV of cash flows < 10% = modification

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Subsequent Event and Going Concern Analyses

• Companies should consider including Type-II subsequent event disclosures amidst concerns of COVID-19.

– Such disclosures should be contemplated if certain criterion under ASC 275-10-50 is met with regard to COVID-19 impacts.

– For public companies, the SEC expects filings to incorporate discussion surrounding COVID-19 in the “Risk Factors” and “Management Discussion and Analysis” sections.

• Management’s going concern assessments are expected to include discussions surrounding liquidity, business disruption, cash burn, and other factors impacted by COVID-19.

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SEC Update

SEC on Financial Reporting

• In light of the significant impacts of COVID-19, the SEC has placed great stress on the importance of high-quality financial reporting.– The SEC has provided a 45-day grace period for filings through

July 1, 2020, with an appropriate 8-K filing.– The SEC has recognized several areas that will require significant

judgment/estimates for COVID-19’s impact, and remains open for consultation on these matters.

– The SEC encourages robust disclosures on the evolving effects of COVID-19 and the risks it poses to operations, including the usage of forward-looking estimates.

• SEC enforcement activity is expected to heavily increase as the SEC seeks to identify offenders perpetrating schemes related to COVID-19.

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SEC on Disclosure of COVID-19 Impact

• The SEC encourages issuers to include analysis of COVID-19 on topics including, but not limited to:

– How has the company responded to the hardships of COVID-19?– How is the company’s financial position, and how might it

change?– How has the pandemic effected the value of assets?– How has the pandemic effected the company’s overall financial

condition?• With regard to Non-GAAP financial measures, the SEC

reminds registrants to refrain from incorporating COVID-19 related adjustments for the purpose of presenting a more favorable view of the company.

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Financial Reporting Reminders for 2020

FASB Accounting ReliefDeferral of Effective Dates

Accounting Standards Update Deferral Applicability

Effective Date Before Deferral

Effective Date After Deferral

ASU 2016-02, Leases (Topic 842)

Private companies; Public not-for-profit organizations

Private Companies: Effective for annual reporting periods beginning after December 15, 2020, and interim periods with annual periods beginning after December 15, 2021.

Public Not-For-Profits:Effective for annual reporting periods beginning after December 15, 2018.

Private Companies: Effective for annual reporting periods beginning after December 15, 2021, and interim periods with annual periods beginning after December 15, 2022.

Public Not-For-Profits:Effective for annual reporting periods beginning after December 15, 2019.

ASU 2014-09, Revenue from Contract with Customers (Topic 606)

Non-public franchisors

Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, and interim periods with annual periods beginning after December 15, 2019.

Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, and interim periods with annual periods beginning after December 15, 2020.

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)

Insured depository institutions, bank holding companies, or any affiliates.

Public Depository Institutions, Bank Holding Companies, and Affiliates: Effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2019.

Public Depository Institutions, Bank Holding Companies, and Affiliates: Effective the earlier of: 1) The date on which the COVID-19 outbreak declared by the President on March 15, 2020 under the National Emergencies Act terminates or 2) December 31, 2020.

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Upcoming Accounting Standards

ASU No. Accounting Standards Update Public Business Entities (PBEs) All Other Entities

2017-04 Simplifying the test for goodwill impairment Effective for annual or any interim impairment tests in fiscal years beginning after Dec. 15, 2019.

Smaller Reporting Companies (SRCs) and Other Entities - Effective for annual or any interim impairment tests in fiscal years beginning after Dec. 15, 2022.

2018-13 Fair value measurements – changes to disclosures

Effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2019.

Same as PBEs.

2018-15Customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract


Effective for annual reporting periods beginning after December 15, 2020, and interim periods with annual periods beginning after December 15, 2021.

2018-17 Consolidation – improvements to related party guidance for variable interest entities



2018-18 Collaborative arrangements – interaction of ASC 808 and ASC 606



2019-08 Share-based consideration payable to a customer



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ASU 2017-04

Pre ASU 2017-04 Post ASU 2017-04

Step 1 Determine whether the fair value of a reporting unit is below its carrying amount.

Step 2 Determine amount of implied goodwill (FV of reporting unit less FV of assets less liabilities)

Eliminated.

Goodwill ImpairmentCharge =

Amount by which implied goodwill is below its carrying value.

Amount by which fair value of the reporting unit is below its carrying value.

Simplifying Goodwill Impairment Testing

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• ASU 2017-04 requires companies to disclose reporting units with zero or negative carrying values.

ASU 2018-15

• This standard applies to cloud computing (i.e., hosting arrangements) that are service contracts.

– This standard does not apply to software licenses, which are accounted for under ASC 350-40.

• Main provisions of this standard are:– The alignment of capitalization cost requirements of hosting arrangements

with the requirements of capitalizing implementation costs of internal-use software.

– The requirement to disclose fees paid for the hosting element of the arrangement in the same financial statement line item as the expense related to capitalized implementation costs.

– The useful life for the capitalized asset should be in alignment with the term of the hosting contract, inclusive of reasonably certain renewal periods.

Cloud Computing Arrangements

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MBA

FCPA

.CO

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THANK YOU FOR ATTENDING!

Jesus SocorroManaging Principal of Risk & Transaction Advisory Practice

[email protected](212) 931-9167

Emma FloreaPrincipal


Miguel VelasquezPrincipal


Dennis BartoeSenior


Documents

Webinar: Financial Reporting Considerations Surrounding ......SEC on Financial Reporting • In light of the significant impacts of COVID- 19, the SEC has placed great stress on the