Companies worldwide continue to feel the ripple effects of the novel coronavirus (COVID-19) outbreak. For-profits such as retailers closed their doors due to statewide “stay at home” orders that keep shoppers from the malls and stores. Nonprofits such as food banks feel increased demands on their services while others face unprecedented challenges to keep their doors open. Everywhere, everything we once knew as certainty is changing, and changing rapidly, with no end date in sight.
In addition to the legal and insurance impacts of the COVID-19 pandemic are the economic, financial, and accounting ramifications of the stay-at-home order. Several FASB guidelines can be applied to the current situation and used to inform investors, donors, and the public about the impacts upon a nonprofit’s financial reporting statements.
FASB Accounting Standards Codification (FASB ASC) 855: Subsequent Events
FASB Accounting Standards Codification (FASB ASC) 855, Subsequent Events, defines the topic as “events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.” There are two types of Subsequent Events: recognized and nonrecognized. COVID-19 likely falls into the nonrecognized category, which is defined as “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, nonrecognized subsequent events). If the balance sheet was prepared before March 1, 2020, when COVID-19 first came to attention in the United States, it is likely a nonrecognized event.
FASB ASC 855 provides more details.
Organizations should reassess now when and if they will be able to meet the objectives outlined in their 2019 reports or the previous quarter’s reports. Many nonprofits face unprecedented changes, shifts, and disruptions; plans that sounded reasonable a few weeks ago might be unreasonable now.
How you disclose such changes are up to you, but some are including disclosures in their updated reports. Nonprofits must watch their portfolios, including equity stakes in bonds and other investments, and determine if they should disclose how the pandemic is affecting them.
Accounting Estimates May Be Off
Just as plans that looked reasonable a few weeks ago might be unattainable now, so too accounting estimates may be very far off. Nonprofit accounts must make prudent judgments now about the accounting estimates. AU-C 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures, can be of help when making decisions about estimates.
If information becomes available after the date of financial reporting (but before they are issued) about losses due to COVID-19 that an asset is impaired or is likely to be impaired, you may need to disclose it. If the event occurred before the balance sheet date, an accrual should not be made. Disclosure, however, might be required. See FASB ASC 450-20-50-9 for disclosure details. Most disclosures should include the nature of the contingency and an estimate of the possible losses.
What About Leases?
Many landlords are changing the terms of leases to help their tenants during the COVID-19 crisis. If you’re fortunate to have such a landlord, you may need to determine if the modifications change the lease classification. In other words, according to FASB ASC 840, Leases, specifically 840-10-35-4, if the substitution of the modified provision changes the lease and pushes it into a new category.
Where the new lease standard (FASB ASC 842, Leases) has been adopted, when a lease modification occurs, the lessee has to determine whether the lease modification will be accounted for as a separate contract or as a change to the existing agreement. There’s no one best way; each organization must choose its path based on its current financial information.
Auditor’s Reports: Emphasis of Matter (EOM)
Some auditors may choose to include an Emphasis of Matter (EOM) statement in their reports if they deem the impact of COVID-19 significant enough to warrant bringing it to the reader’s attention. Each auditor must use prudent professional judgment to determine whether adding an EOM statement is necessary.
COVID-19 is exacting an enormous toll on the world. The loss of life is irreplaceable—the shock to the economy, unforeseen. Nonprofits, like all companies facing this unique situation, must use their best judgment during the preparation and reporting of financial statements to remain compliant with GAAP standards.
If you need any assistance during these times, Welter Consulting is here for you. We can be reached by phone (206-605-3113) or online.