These Balance Sheet Accounts May Be Vulnerable to COVID-19-Related Effects

During each reporting period, companies may need to account for any COVID-19-related risks in their financial statements. Balance sheet accounts that may be materially affected by the pandemic include:

Financial assets. Companies should consider the potential for impairment, as well as the need to adjust cash flow projections and other assumptions used to measure nonquoted financial instruments. Financial assets reported at fair value on the balance sheet may result in realized and unrealized losses.

Receivables. Customers that have been adversely affected by the pandemic may be unable to pay outstanding invoices, which will impact the total of receivables outstanding and cause delays in collecting receivables balances. This situation could result in additional credit and liquidity risks, increased bad debts, and longer collection terms, which may require conversion to notes receivables or other non-current assets and increased write-offs. Cash flows from operations may also be affected due to the delay of payments received. Determining an appropriate estimate of the allowance for doubtful accounts as of the reporting period is an important step.

Inventory. The pandemic may have disrupted supply chains and productivity. Companies with reduced or idle production capacity may be unable to allocate overhead costs to inventory as they usually do. In addition, inventory that can’t be turned over because of travel restrictions may have to be evaluated for impairment. Finally, changes in prices and reduction in the level of demand will also have to be taken into consideration. For inventory accounted for on a method other than the last-in first out method, determining that inventory is held at the lower of cost or net realizable value as of the reporting period is an important step. When evidence exists that the net realizable value of an inventory item is lower than its cost, the difference shall be recognized as a loss in earnings in the period in which it occurs. That loss may be required, for example due to damage, physical deterioration, obsolescence, changes in price levels, or other causes.

Pensions and other retirement plans. Financial market volatility has affected the measurement of these accounts. Companies may have to revisit both the expected return on plan assets and the funded status of the plans. Additionally, due to employee layoffs, affected plan participants may become fully vested in their account balances at their termination date due to a full or partial plan termination. Based on IRS rules, a partial termination can occur if approximately 20% or more of the plan participants are terminated by the plan sponsor as a result of an action, such as a plant closure, a decision to downsize, or the termination of a product line. The reduction can accumulate over one or more plan years and still be classified as a partial termination. Consultation with the IRS or qualified legal counsel may be necessary.

Deferred tax assets. If estimates of earnings of foreign subsidiaries change, companies may have to reconsider some of their tax strategies, or they may not be able to realize all deferred tax assets. Accordingly, determining an appropriate deferred tax valuation allowance as of the reporting period is an important step.

Property, plant and equipment. Entities in geographic markets or industries heavily affected by COVID-19 may be impacted by the recoverability of long-lived assets. Triggering events may create the need to perform impairment testing for long-lived assets other than goodwill and other intangible assets.

Goodwill and other intangibles. An entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. However, the entity can skip directly to the quantitative test and can resume performing the qualitative test in any subsequent period. Goodwill should be tested for impairment at the reporting unit level.

For more information about the impact related to COVID-19 regarding these or other risks on your company’s financial statements, contact us. We are here to help.

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