As the United States enters its third month of battling the uncertain times of COVID-19, businesses are faced with the challenges of operation interruptions, cash flow and revenue concerns and volatility in the stock market. Businesses must consider the financial reporting impact and the appropriate disclosure of the coronavirus disease’s effect.
Accounting standards define subsequent events as events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be. There are two types of subsequent events:
- The first type consists of events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events).
- The second type consists of events that provide evidence about conditions that did not exist at the date of the balance sheet but arose subsequent to that date (that is, non-recognized subsequent events).
Based on the first reported positive cases of the disease in the United States beginning January 14, 2020 and the limited domestic economic impact prior year calendar year-end, it is likely that COVID-19-related subsequent events would be identified as non-recognized subsequent events. Disclosure of non-recognized events are intended to prevent financial statements from being misleading and require disclosure of the nature of the event and an estimate of the financial effect of the event (or a statement that an estimate cannot be made). The predominant subsequent events regarding this pandemic include a decline in the market value of debt and equity securities and the impact on business operations.
Market Value Declines
Significant declines in the stock market continue to mount amidst the worldwide struggle against COVID-19. Year-to-date the S&P 500 has declined with marginal signs of reduced volatility. That said, non-public entities generally do not explicitly disclose potential changes in the value of recognized assets due to foreseeable future risks. In its place, many entities include a standardized disclosure regarding the risk of market value declines of assets. Entities should evaluate whether an explicit disclosure regarding the decline in securities as a result of COVID-19 or a classic statement regarding risk of market value is necessary. Factors such as the significance of securities in relation to, and the liquidity of, remaining assets should be considered when making this determination.
Business operations have been considerably altered during this time of uncertainty. While a few industries have seen unprecedented highs, the majority of businesses have shuttered at the request or order of authorities. Although an estimated amount of the financial statement effect is likely not possible considering the uncertainty of the duration of this crisis, qualitative disclosure of such economic interruption should be contemplated as to not mislead financial statement users.
We will continue to follow developments and provide guidance and clarity surrounding COVID-19 reporting issues. We are only on the surface of the economic impact this devastating event has had on businesses. For business questions related to or to discuss COVID-19's effect on your business, please contact your trusted HBK advisor.