Two-thousand twenty was a year of countless challenges and setbacks. But it’s also witnessed impressive innovation, improvisation, and modification. As companies addressed the challenges spawned by COVID-19 — from supply chain disruptions to government-ordered shutdowns and from virtual workforces to the Coronavirus Aid, Relief, and Economic Security Act — they’ve frequently had to think on their feet. Now, as CFOs face the demands of year-end accounting and financial reporting, they’re pondering which issues need to be front and center and how to frame them.
The 2020 year-end is about capturing and communicating all the complexities and temporary fixes without losing sight of a new path forward. As I see it, there are four issues to which CFOs need to give added attention:
1. Forecasting and related impairment analyses have presented, for many companies, recurring challenges throughout the year, regardless of whether COVID-19 has created major setbacks or opportunities. Even if those impairment analyses were completed fairly recently, they should be revisited and potentially updated at year-end to account for the last several months’ vicissitudes. CFOs need to pay particular attention in their impairment analyses to such issues as the recoverability of deferred tax assets, goodwill, other intangible assets, right-of-use (lease) assets, and revenue-related contract assets.
If we’ve learned one thing over the past 10 months, it’s this: generating an economic recovery is not like flipping a switch from “off” to “on.” Instead, it’s more like a dubious dimmer. Sometimes the lights go up, and then down, and then up again. So, whatever the path to economic recovery, there’s no going back to the status quo ante. There’s no dusting off the old forecasts. Forecasts need to weigh contingencies while also developing and evolving business strategies — again, regardless of whether COVID-19 has meant downsizing or growth. That means fresh thinking about supply chain disruptions, customer behavior patterns, and workforce adjustments, among many other issues.
2. The going concern analysis has taken on a new significance. In the past, some may have viewed long-term forecasts, which have a longer event horizon, as more difficult to craft than the shorter-term forecasts typically used in going concern analysis. Today, that may not be the case. The pressing issues of assessing liquidity, determining working capital shortfalls, projecting sudden diminished or increased demand, weighing the impact of government assistance — all of these variables are harder than ever to determine. So, in many ways, the short-term forecast used for a going concern analysis has become even more complicated than the long-term forecast, which may assume some kind of economic recovery with less precision about that recovery’s timing.
In fashioning the going concern analysis, one of the most important considerations is whether management has the means to implement its plans in a variety of environments. For example, what happens if certain anticipated triggers — such as widespread vaccination — do not occur with the speed initially projected? For CFOs, that all boils down to more systematic contingency planning, weighing of options, and creation of rigorous scenarios and decision trees.
3. Internal controls have, in all likelihood, undergone constant modification as the year progressed. As CFOs ponder the state of their internal controls at year-end, they need to ask themselves questions in four critical areas: 1) What changes have occurred in transaction flows and processes 2) Which job responsibilities have changed (e.g., as a result of the company’s possible restructuring or downsizing)? Assumptions about the reassignment of duties can be dangerous and may lead to things falling between the cracks. 3) What are CFOs doing to protect against cyberattacks? With a greater portion of the workforce relying on virtual office environments, the opportunity for human error and the likelihood of more cyberattacks may have increased. 4) How are CFOs protecting against fraud? Again, a virtual environment may present an increased level of fraud risk, as well as different opportunities for fraud.
In sum, while some aspects of the internal control environment may have changed during COVID 19, the requirement for effective internal controls over financial reporting has not. Accordingly, CFOs should not lose sight of what is required in terms of effective internal controls versus what may now seem “normal” or “common” practice for dealing with the challenges currently presented.
4. Stakeholder communications need to go beyond compliance with U.S. generally accepted accounting principles to provide a new level of transparency. That, in turn, will likely inspire confidence among stakeholders. In developing year-end disclosures, CFOs should be open to giving background on how estimates were arrived at and what key assumptions informed them. If possible, they should also explain how estimates may change after the financial statements are issued in light of currently available information. CFOs should be clear about whether the use of non-GAAP metrics includes COVID-19-related adjustments. And if that’s the case, has the company reassessed whether such adjustments remain “unusual or incremental” in light of the ongoing uncertainty and the potential for “permanent” changes in the company’s business operations?
Stakeholder communications should include an explanation of how management arrives at its estimates and strategies; how it thinks about a variety of variables from liquidity to capital resources and from business continuity to the supply chain. When faced with uncertainty, there may be a tendency to shy away from providing details and estimates for fear of being wrong. But, in the current times, building stakeholder confidence and trust are of utmost importance.
This list does not pretend to be exhaustive. There are a host of other issues to attend to as well — from updating the value of certain financial instruments to reviewing lease contracts and from managing changes in employee benefits to an updated evaluation of revenue cycle accounting. But in the end, it is critical that CFOs lead their companies to account for all the changes, assumptions, and adjustments made over the year and provide the greatest transparency possible.
Eric Knachel is a senior consultation partner in the professional practice network at Deloitte & Touche LLP with more than 25 years of experience. He leads Deloitte’s revenue recognition subject-matter team and provides guidance to audit practitioners and companies on complex financial accounting and reporting issues.
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.
Copyright © 2020 Deloitte Development LLC. All rights reserved.