13 accounting and reporting issues to address during COVID-19 | Baker Tilly

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13 accounting and reporting issues to address during COVID-19 | Baker Tilly

3. Recoverability and impairment of assets

Contract assets

As is the case with receivables, entities that have contract assets will need to evaluate recorded amounts for impairment in accordance with ASC 310 by assessing the customer’s ability to pay amounts when due.

The customer’s ability to pay could be adversely affected by the current economic instability.

Property, plant, and equipment (PP&E)

Your business should consider if the impact of the pandemic has caused:

A decline in revenues
An increase in costs or decline in net cash flows
Both revenue decline and cost increases

Such changes could indicate that you should test your long-lived assets for recoverability.

Every company will be affected differently in terms of its cash flows and the susceptibility of its long-lived assets to impairment, so plan to document your considerations regarding recoverability.

Useful lives

Regardless of whether you recognize an impairment loss, you should still consider if the existence of a trigger indicates there’s been a change in the useful life or salvage value of your long-lived assets.

If a change is present, revise your depreciation or amortization estimates accordingly. Any revision to the remaining useful life of a long-lived asset should also be considered in developing estimates of future cash flows used to test the asset or asset group for recoverability.

Right-of-use assets

Impairments to right-of use (ROU) assets could occur as a result of:

Business closures
Supply chain disruption
Other consequences of the pandemic that negatively affect future cash flows derived from the use of the underlying PP&E

Intangible assets other than goodwill

Indefinite-lived intangible assets are tested annually for impairment and more frequently if an event or a change in circumstances indicates the intangible asset is impaired in accordance with ASC 350-30.

The macroeconomic slowdown from COVID-19 could initiate circumstances which indicate possible impairment of intangible assets.

In addition to evaluating the need for an interim impairment test, you should consider if there are any indicators an intangible asset classified as indefinite-lived has become finite-lived. This might occur if you change the expected use of the asset in response to the effects of the pandemic.

Goodwill

As a result of the pandemic, more businesses are expected to conclude they’re required to test the goodwill of one or more reporting units for impairment between annual testing dates.

Under U.S. generally accepted accounting principles (GAAP), an entity is required to test between annual testing dates if an event occurs or circumstances change that would likely reduce the fair value of a reporting unit below its carrying amount.

6. Revenue contracts

As a result of business disruptions associated with the pandemic, you might be prevented from entering into customer agreements through your normal business practices.

This could present a challenge when determining whether or not you have enforceable rights and obligations.

In addition, many of your customers are likely experiencing financial difficulties and liquidity issues.

As a result, you may need to:

Develop additional procedures to properly assess the collectability of your customer arrangements
Consider changes in estimates related to variable consideration

Variable consideration

Due to a business disruption, you may need to assess variables related to revenue including:

Rebates
Discounts
Refunds
Price concessions

Material right

To mitigate any decline in sales, you could offer customers sales incentives, including discounts on future goods or services.

Such incentives on the purchase of future goods or services should be assessed to determine if they represent:

Material rights
Discounts that are recognized in the future upon redemption

In addition, for new contracts, you may need to update your estimate of the stand-alone selling price of a material right if you extend the periods for use or provided additional incentives to a customer.

You may also need to reassess your breakage assumptions because of extensions or changes in expected usage patterns.

For example, modifying a loyalty program by extending your customers’ ability to use points could require you to reassess the breakage assumptions used.

Significant financing component

To assist customers experiencing liquidity issues in purchasing goods and services, you could provide extended payment terms.

Similarly, if facing your own liquidity issues, you could require customers to make an up-front payment in order to fulfill your promised goods or services.

In those circumstances, you should evaluate whether or not a significant financing component exists.

Implied performance obligations

During these challenging times, you might consider providing customers free goods or services that aren’t explicitly promised in the contract.

In these situations, you should determine whether or not your contracts contain:

Promised goods or services that are implied by your customary business practices
Published policies
Specific statements that create a reasonable expectation that you’ll transfer those goods or services

Revenue recognition

Due to potential supply disruptions or other circumstances, you may need to reconsider the timing of revenue recognition if you’re unable to satisfy your performance obligations on a timely basis.

In addition, you’ll need to determine if there are any contractual penalties that would affect the transaction price. In some cases, you could be completely unable to satisfy your performance obligation.

This could result in:

Termination of the contract
Reversal of any revenue previously recognized for a performance obligation that wasn’t fully satisfied
Recognition of a refund liability, or additional liability due to a payment of penalties, instead of deferred revenue

You could also incur unexpected costs in fulfilling a performance obligation that’s satisfied over time. Therefore, you may need to reevaluate the expected costs to complete your contracts and consider future material, labor, and the allocation of overhead rates.

If you have construction and production-type contracts, you may also need to consider if a change in your estimated costs would result in a contract loss that needs to be recognized immediately.

Disclosure requirements

Your disclosures could also be impacted by the pandemic.

Impacts on disclosures could include but aren’t limited to:

Disclosures of significant changes in the contract asset due to an impairment
Significant payment terms, including any significant financing component
Timing of when you expect to recognize revenue for remaining performance obligations

Given the level of uncertainty caused by the pandemic, it could be challenging to make certain critical estimates. Therefore, it’s important to disclose any significant judgments you made in accounting for your revenue contracts.