Two-thousand twenty was a yr of numerous challenges and setbacks. Nevertheless it’s additionally witnessed spectacular innovation, improvisation, and modification. As firms addressed the challenges spawned by COVID-19 — from provide chain disruptions to government-ordered shutdowns and from virtual workforces to the Coronavirus Help, Aid, and Financial Safety Act — they’ve ceaselessly needed to assume on their ft. Now, as CFOs face the calls for of year-end accounting and monetary reporting, they’re pondering which points must be entrance and middle and the best way to body them.
The 2020 year-end is about capturing and speaking all of the complexities and momentary fixes with out shedding sight of a brand new path ahead. As I see it, there are 4 points to which CFOs want to provide added consideration:
- Forecasting and associated impairment analyses
- Going concern evaluation
- Inside controls
- Stakeholder communications
1. Forecasting and associated impairment analyses have introduced, for a lot of firms, recurring challenges all year long, no matter whether or not COVID-19 has created main setbacks or alternatives. Even when these impairment analyses have been accomplished pretty lately, they need to be revisited and doubtlessly up to date at year-end to account for the final a number of months’ vicissitudes. CFOs must pay specific consideration of their impairment analyses to such points because the recoverability of deferred tax property, goodwill, different intangible property, right-of-use (lease) property, and revenue-related contract property.
If we’ve realized one factor over the previous 10 months, it’s this: producing an financial restoration will not be like flipping a change from “off” to “on.” As an alternative, it’s extra like a doubtful dimmer. Typically the lights go up, after which down, after which up once more. So, regardless of the path to financial restoration, there’s no going again to the established order ante. There’s no dusting off the previous forecasts. Forecasts must weigh contingencies whereas additionally creating and evolving enterprise methods — once more, no matter whether or not COVID-19 has meant downsizing or development. Meaning contemporary fascinated with provide chain disruptions, buyer habits patterns, and workforce changes, amongst many different points.
2. The going concern evaluation has taken on a brand new significance. Previously, some could have seen long-term forecasts, which have an extended occasion horizon, as tougher to craft than the shorter-term forecasts usually utilized in going concern evaluation. As we speak, that might not be the case. The urgent problems with assessing liquidity, figuring out working capital shortfalls, projecting sudden diminished or elevated demand, weighing the impression of presidency help — all of those variables are tougher than ever to find out. So, in some ways, the short-term forecast used for a going concern evaluation has turn into much more difficult than the long-term forecast, which can assume some form of financial restoration with much less precision about that restoration’s timing.
In fashioning the going concern evaluation, one of the vital essential issues is whether or not administration has the means to implement its plans in a wide range of environments. For instance, what occurs if sure anticipated triggers — corresponding to widespread vaccination — don’t happen with the pace initially projected? For CFOs, that every one boils all the way down to extra systematic contingency planning, weighing of choices, and creation of rigorous situations and determination timber.
3. Inside controls have, in all chance, undergone fixed modification because the yr progressed. As CFOs ponder the state of their inside controls at year-end, they should ask themselves questions in 4 essential areas: 1) What adjustments have occurred in transaction flows and processes 2) Which job duties have modified (e.g., on account of the corporate’s potential restructuring or downsizing)? Assumptions concerning the reassignment of duties may be harmful and should result in issues falling between the cracks. 3) What are CFOs doing to guard towards cyberattacks? With a higher portion of the workforce counting on digital workplace environments, the chance for human error and the chance of extra cyberattacks could have elevated. 4) How are CFOs defending towards fraud? Once more, a digital surroundings could current an elevated stage of fraud threat, in addition to completely different alternatives for fraud.
In sum, whereas some features of the interior management surroundings could have modified throughout COVID 19, the requirement for efficient inside controls over monetary reporting has not. Accordingly, CFOs mustn’t lose sight of what’s required by way of efficient inside controls versus what could now appear “regular” or “widespread” apply for coping with the challenges presently introduced.
4. Stakeholder communications must transcend compliance with U.S. usually accepted accounting ideas to offer a brand new stage of transparency. That, in flip, will seemingly encourage confidence amongst stakeholders. In creating year-end disclosures, CFOs ought to be open to giving background on how estimates have been arrived at and what key assumptions knowledgeable them. If potential, they need to additionally clarify how estimates could change after the monetary statements are issued in gentle of presently out there info. CFOs ought to be clear about whether or not the usage of non-GAAP metrics consists of COVID-19-related changes. And if that’s the case, has the corporate reassessed whether or not such changes stay “uncommon or incremental” in gentle of the continued uncertainty and the potential for “everlasting” adjustments within the firm’s enterprise operations?
Stakeholder communications ought to embrace a proof of how administration arrives at its estimates and methods; the way it thinks about a wide range of variables from liquidity to capital assets and from enterprise continuity to the availability chain. When confronted with uncertainty, there could also be a bent to draw back from offering particulars and estimates for worry of being mistaken. However, within the present instances, constructing stakeholder confidence and belief are of utmost significance.
This checklist doesn’t faux to be exhaustive. There are a bunch of different points to take care of as nicely — from updating the worth of sure monetary devices to reviewing lease contracts and from managing adjustments in worker advantages to an up to date analysis of income cycle accounting. However in the long run, it’s essential that CFOs lead their firms to account for all of the adjustments, assumptions, and changes revamped the yr and supply the best transparency potential.
Eric Knachel is a senior session companion within the skilled apply community at Deloitte & Touche LLP with greater than 25 years of expertise. He leads Deloitte’s income recognition subject-matter workforce and offers steering to audit practitioners and firms on advanced monetary accounting and reporting points.
This publication accommodates normal info solely and Deloitte will not be, via this publication, rendering accounting, enterprise, monetary, funding, authorized, tax, or different skilled recommendation or companies. This publication will not be an alternative to such skilled recommendation or companies, nor ought to it’s used as a foundation for any determination or motion that will have an effect on your enterprise. Earlier than making any determination or taking any motion that will have an effect on your enterprise, you must seek the advice of a certified skilled advisor. Deloitte shall not be liable for any loss sustained by any one that depends on this publication.
As used on this doc, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for an in depth description of our authorized construction. Sure companies might not be out there to attest shoppers below the principles and laws of public accounting.
Copyright © 2020 Deloitte Growth LLC. All rights reserved.
