2021 has ushered in new challenges for financial reporting. Organizations should not delay addressing the most important technical questions.
Perhaps the best advice for 2021 financial reporting is to ask critical questions early. Finance leaders who embrace this approach can give their teams more time to focus on formulating answers and help them successfully navigate the complexities of reporting in the wake of a tumultuous year.
In our January webinar, “Financial Reporting in 2021: Meeting New Challenges and Applying Lessons Learned,” Crowe specialists highlighted critical challenges finance teams are facing. Read on for 10 of the most pressing financial reporting questions these teams should be asking now.
Accounting guidance and financial reporting processes
1. What data and documentation requirements should be top of mind for closing out 2020 financial reporting?
The financial ups and downs of 2020 will, for many companies, require more extensive reporting to satisfy auditors, including detailed documentation and data for the following:
- Critical accounting estimates. Organizations should assemble detailed documentation to support asset impairment assessments, fair value measurements, and going concern assessments, among other critical accounting estimates and judgments. More granular or new data sets might also be required for forecasting and budgeting.
- Government assistance programs. Organizations should retain all documentation and data required by the receipt of government assistance program funds, such as payroll support and other expenses eligible for Paycheck Protection Program (PPP) loan forgiveness. Organizations also should be aware of any new data and reporting requirements from these government programs.
2. What should organizations do to identify a complete and accurate listing of contract modifications entered into during 2020?
Establishing strong internal communication and accountability across teams is critical, and organizations should evaluate these two areas in particular.
- Communication. Finance teams must establish ongoing dialogues with different teams responsible for various types of modifications, such as procurement, sales, treasury, and corporate real estate. With effective collaboration and established lines of communication, teams can discover and catalog all modifications, especially those that were finalized informally, such as over email or by phone.
- Accountability. Finance teams also can assign ownership and accountability for modifications to various departments (for example, sales or procurement). These departments would be responsible for making sure and representing that all modifications have been identified.
3. How might the pandemic affect an organization’s year-end audit? What should finance leaders start discussing with auditors now?
- Virtual audits. Many audit teams will not be out in the field as much as they have been in the past – or perhaps not at all. Finance teams should be prepared to provide their documentation virtually. For some organizations, this shift might require a new level of comfort with technology for sharing screens, exchanging data, and managing audits.
- Covenants. Companies should consider how the events of the past year affect their debt covenants. Have they discussed negative impacts with their lenders? Also, if organizations need debt waivers and amendments, they should first discuss them with their auditors before talking to their banks. This step could help ease complications after the fact.
4. What are some of the most important reminders to help organizations navigate the complexities of asset impairment accounting?
- Accounting guidance. Finance teams need to be mindful of relevant triggering events, testing frequency, and the order of impairment testing.
- Documentation. Organizations might need to produce more robust documentation for the following:
- Management's judgment on whether a triggering event has occurred
- How cash flow estimates were determined
- How different scenarios were considered
- If applicable, how discount rates or fair value estimates were derived
- Whether an asset is ultimately considered impaired
- Analysis. Organizations should confirm that the correct inputs are used in an impairment analysis. Specifically, they must ensure the facts and circumstances that existed at the time a triggering event occurred are used.
- Estimates. Organizations should check that estimates and assumptions used in the impairment analysis are consistent across the organization and be able to justify any differences.
- Support. Organizations should consider seeking third-party assistance to navigate difficult asset impairment issues.
5. How should finance teams approach their accounting analysis of real estate leases, especially for vacant real estate?
Here are a few of the most important reminders:
- Organizations should begin by assessing the leases for impairment. If the new lease standard (ASC 842) has been adopted, organizations would look to ASC 360 to determine if the right-of-use (ROU) asset is impaired. If it is not impaired, they should next consider whether the estimated useful life of the ROU asset should be revised. This step involves considering how long the entity plans to use the property. For example, if the lease is to be permanently abandoned, then the carrying amount of the ROU asset should be amortized to zero by the cease-use date.
- If still under the old lease standard (ASC 840), organizations might need to accrue a liability if either the leased space is sublet at a loss or if the leased space has been permanently abandoned.
- If organizations have entered into lease concessions, they should review the April 2020 Financial Accounting Standards Board (FASB) staff Q&A document (or this FAQ) to determine whether they should apply a practical expedient to simplify the accounting for COVID-19-related lease concessions.
6. What are some of the critical accounting issues that financial institutions are facing because of COVID-19?
- Estimates around the current expected credit loss (CECL) model. Due to the significant uncertainty brought on by the pandemic, it has become much more difficult to estimate expected credit losses under CECL. For example, many financial institutions had to revise their reasonable and supportable forecast periods.
- Loan modifications. The uptick in loan modifications has put pressure on financial institutions to get the accounting right. As part of their analyses, financial institutions also need to determine whether to apply interagency guidance or the CARES Act deferral of troubled debt restructuring (TDR) guidance. In addition, whether accounted for as a TDR or not, financial institutions need to adequately disclose loan modifications, reconsider the appropriateness of nonaccrual status policies, and establish appropriate allowances for credit losses on modified loans (including on the accrued interest receivable component).
- PPP loan administration. Financial institutions face many technical accounting questions around their administration of the PPP loan program on behalf of the Small Business Administration (SBA), especially on income recognition questions. They can find answers via the technical questions and answers (TQAs) developed by the American Institute of CPAs. For more in-depth guidance, refer to our “PPP Financial Reporting for Lenders: 10 Questions Answered.”
7. What resources has the FASB provided to organizations as they consider their response to COVID-19?
In responding to COVID-19 financial reporting challenges, organizations should take advantage of the following resources made available by the FASB:
- FASB staff Q&A documents on topics such as accounting for leases, revenue recognition, interest income recognition, and cash flow hedge accounting
- FASB staff educational document on accounting for debt restructurings and modifications
- FASB’s Technical Inquiry Service through which organizations can submit interpretive questions about guidance in the Accounting Standards Codification
- FASB’s COVID-19 resources page, which includes links to the above and other FASB resources
In addition to making these resources available, the FASB also has provided organizations with relief in the form of deferred effective dates for the new revenue recognition and lease accounting standards for certain entities. The FASB also soon plans to issue a new ASU that will provide private companies with a new practical expedient to simplify the testing of goodwill for impairment.
8. How should organizations account for their PPP loans from 2020 if forgiveness has not yet been granted or if forgiveness is received in 2021?
Further insights on PPP loan forgiveness include:
- If an organization expects to obtain forgiveness, it may choose to account for the PPP loan as an in-substance grant under IAS 20 or ASC 958-605.
- A PPP loan can always be accounted for as debt. If forgiveness was not received by the end of 2020, it would be presented as debt and classified as short-term or long-term based on contractual terms. However, if forgiveness is received in 2021 before financial statements are issued, the entire debt can be classified as long-term.
- Organizations that apply the debt model must ensure no profit and loss (P&L) benefit is recognized until forgiveness is received from the SBA (not the lender). If forgiveness occurs in 2021, then there would be no P&L benefit in 2020.
- If the PPP loan is accounted for as a grant, the timing of loan forgiveness generally would not affect 2020 accounting.
9. In what ways does the receipt of government assistance affect an organization’s going concern assessment? Can government assistance be relied on as a source of funding if it is conditional?
Before considering government assistance as part of a plan to alleviate substantial doubt, management should consider the organization’s eligibility for the assistance and its compliance with the relevant criteria.
For example, management should not assume that a PPP loan will be forgiven in its going concern cash-flow analysis. Depending on the facts and circumstances, management might be unable to determine whether forgiveness is probable until it is granted by the lender or SBA.
Organizations should remember that estimates and assumptions must be consistent for all reporting. If the organization has determined that it is probable a PPP loan will be forgiven and, therefore, is accounting for the loan as an in-substance grant, then it would be reasonable to assume forgiveness of a PPP loan for the going concern assessment.
Other recommendations for organizations that are exploring scenarios for going concern and PPP loan forgiveness include consideration of:
- The expected magnitude and timing of the receipt and forgiveness of government assistance in relation to the events that gave rise to substantial doubt. Will government assistance be adequate to mitigate substantial doubt within one year after the date the financial statements are issued (or available to be issued)?
- The totality of management's plan when assessing whether it is probable that such plan will effectively mitigate substantial doubt within one year. Are there other significant factors – beyond government assistance – that management also is including in its plan? Or is management's plan predicated solely or primarily on government assistance?
10. How can financial leaders best prepare their organizations for additional rounds of government assistance funding?
- Review lessons learned. Leaders and teams should reflect on their greatest challenges and weaknesses during the first rounds of government assistance. What issues posed the biggest problems? What processes can organizations improve for next time?
- Explore all opportunities. Organizations should consider whether they are eligible for any new forms of upcoming government assistance. If necessary, they should engage specialists who can help them think through the implications and opportunities, such as tax optimization strategies or cash flow liquidity optimization.
- Be prepared for changes. The terms of government assistance changed frequently in 2020, which – in some cases – led to changes in accounting outcome. Organizations should establish a process to keep a pulse on any changes to terms and conditions that might affect an organization’s accounting for the assistance.