The international fear created by the outbreak of coronavirus (COVID-19) is palpable. The virus has infected more than 83,000 people in at least 53 countries, leading to worldwide pessimism in global financial markets. Thursday’s 4.4% dip in the S&P 500 was the worst day for American shares since 2011, while the Nikkei 225 in Japan closed down 3.7%, the KOSPI in South Korea dropped 3.3%, and the Shanghai Composite in China fell 3.7%.
Corporations around the world are not just concerned with public health, but the very real financial volatility that could linger long after the virus’s spread comes to a halt. That leaves tax and finance professionals grappling with some important questions they need to answer before they close their books this year. The following are some of the most important considerations.
Will the Coronavirus affect revenue and cost of goods sold? For companies with supply chains heavily reliant on China, for example, possible delays could affect production and material costs. Companies could also incur costs related to procuring goods from new sources on short notice, which would have a material impact on future revenues and cash flows.
Does the organization have assets that have to be impaired? While we can hope that the coronavirus won’t affect things long term, there may still be some impairment required, especially if some suppliers or customers go out of business or experience significant financial difficulties. Bad debt may increase, and finance may have to test goodwill for impairment, along with investments and inventory.
Will market volatility affect the company’s hedging strategy and pensions or other retirement funds? The financial markets are volatile and so are foreign currencies. That volatility could leave businesses exposed to a level of risk that is outside of their accepted guidelines and could trigger unexpected gains or losses, realized or not. Hedging strategies may have to be revisited. Volatility may also affect the measurement of certain pension and other post-retirement plans.
Is finance evaluating subsequent events the right way? Some events occurring after the end of a reporting period may trigger additional disclosures, but others may require an adjustment to the financial statements. Conditions that existed before the end of the reporting period but that come to light between the financial statement date and when the financial statements are made available must be reported within the reporting period.
Are you disclosing the effects of the coronavirus on your business? Public companies will want to understand how this outbreak affects their businesses now and in the future. The company may have to expand liquidity risk disclosures. Securities and Exchange Commission Chair Jay Clayton has expressed several times that the SEC will watch company disclosures closely. In particular, the commission will be looking at disclosures as they relate to an issuer’s financial exposure to the virus as well as how the issuer plans for uncertainty and reacts to events as they occur.
One can only hope that the coronavirus will be short-lived and will not leave any long-term financial scars. However, in the short-term, companies have to address its financial reporting consequences and prepare emergency plans for their people.
Anne-Lise Dorry is senior director of editorial in the tax and accounting business of Thomson Reuters.
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