When COVID-19 caused worldwide closures earlier this year, businesses faced new and unprecedented challenges. Suddenly there were cash flow management questions, employee, and supply chain questions as well as new government policies to consider. One key process that also needs to be considered is how operational interruptions and market decline may impact your financial statement reporting. This is especially true if your lenders require an assurance engagement such as a review or an audit.
In accordance with Accounting Standards for Private Enterprises (ASPE), portfolio investments must be recorded at the lower of their cost & fair market value. If your company has invested money in portfolio investments that have been impacted by the pandemic, and the fair market value is below what you paid, there may be some financial reporting impact and a write down may be necessary. In the event of a write down, this loss would be presented as other income and expenses on your financial statements.
Other areas you will need to consider is whether you are able to collect outstanding receivables or if an allowance is required, whether your long term investments have deteriorated in value and whether your intangible assets will inevitably deliver more economic benefit than the original cost.
Another requirement under ASPE is that financial statements are required to be reported on a going concern basis (your company is able to meet its operational obligations and continue to do business for another 12 month period) unless management either intends to liquidate the entity, to cease trading, or has no realistic alternative but to do so. With the uncertainty of COVID-19, an assessment should be made if there is material uncertainty around your company’s ability to continue on a going concern basis and whether additional disclosures are required in your financial statements as a result of this uncertainty.
Subsequent Event Disclosure
Under ASPE there are two types of subsequent events:
- An event that provides further evidence of conditions that existed at the financial statement date and
- An event that is indicative of conditions that arose after the financial statement date
An analysis will need to be performed when preparing your financial statements to determine the nature and extent of subsequent event disclosure required in your financial statements as a result of the impacts of COVID-19.
Depending on the impact COVID-19 has had on your business operations, consideration needs to be given as to whether there has been a breach (or if there is a risk of a breach) of your debt covenants with lenders or whether there is a risk of covenant clauses being triggered. If triggered, the timing of loan payments and disclosure requirements of your outstanding loans may be changed. Early assessment is key when dealing with covenant analysis to provide you with time to plan a response (such as renegotiating terms with lenders or requesting a grace period) sooner rather than later.
Impact on Audit Testing (Inventory Counts)
With many employers having reduced or isolated staff that are unable to be on site, the prospect of inventory counts poses a challenge. If you find yourself in this position, you have a few options:
- Staff an inventory count as soon as possible and have the auditor attend. The auditor can perform roll back testing procedures to your year-end date.
- If you cannot staff a count, the auditor is unavailable or there is no alternative audit procedures available then a modified opinion may need to be issued.
Accounting for Subsidies
For businesses receiving any type of emergency subsidy offered by the government, these subsidies will need to be recorded in your financial statements. The way you report them will depend on the specific subsidy you have received. For example, the 10% and 75% Canadian Emergency Wage Subsidy (CEWS) are both recorded as other income, whereas the Canada Emergency Business Account (CEBA) is a loan with up to 25% being forgivable, and the balance due by December 31, 2022. This loan is payable for the 75% of the amount borrowed under the CEBA loan should be set up as a loan payable and the other 25% should be recorded to government assistance income. Lastly the accounting for the Canada Emergency Commercial Rent Assistance (CECRA) changes depending on whether you are a property owner or a small business tenant. For property owners the loan should be set up as government assistance income. For small business tenants the reduction in rent should be set up similar to a tenant inducement.