The COVID-19 pandemic is not yet over, and contractors will continue to feel its impact for subsequent years. As far as accounting and financial statements are concerned, preparations should be made for possible changes, including adjustments to Generally Accepted Accounting Principles (GAAP) requirements and disclosures.
Some significant possible changes to GAAP requirements and disclosures affect the following topics:
- Contract modifications
- Debt modifications
- Loan covenants
- Going concern
- Property, Plant, and Equipment (PPE)
- Risks and uncertainties
- Subsequent events
These changes will vary from contractor to contractor due to each running their own unique business.
Effects of an Economic Downturn
With the economy slowing and, in some places, shutting down during this pandemic, it is evident it can lead to long term changes to the economy. Contractors need to take into consideration the following possible effects.
Contracts, debt modifications, loan covenants, and going concern are all directly impacted by this. Contractors will have to analyze their current contracts and possibly renegotiate to proceed on. The same goes for amending existing debt agreements regarding liquidity. The impact on going concern evaluations will require the disclosure of the results from COVID-19 and possible reassessments. This would include things such as key financial ratios, financial projections, and their ability to meet debt covenants.
Inventory and PPE are both similarly affected. ASC Topic 330 states when production is lower than typical, it is required to expense, as an alternative to capitalizing, an allocation of fixed overhead costs. Due to the decrease in the workforce, an adjustment to the carrying value of inventory may be necessary and then disclosed. As for PPE, the carrying amount of an asset may no longer be recoverable, which is required to be disclosed as well.
Risk and Uncertainties
After any pandemic, it is expected there could be a significant increase in risks and uncertainties reported on the financial statements. It is required that contractors disclose the impact of COVID-19 and the effect on their current and future operations for their business. Some areas which are expected to be impacted are volume discounts, variable considerations, rebates in revenue contracts, and asset impairment evaluations. Along with risks and uncertainties come securities. It is no secret that COVID-19 had a major impact on the decline of the economy, therefore capital markets were negatively affected. Therefore, it is required for an individual disclosure to be made of equity securities, debt securities, and equity method investments.
Regarding COVID-19 and subsequent events, contractors must review and disclose the events that occurred because of the pandemic. With the disclosure of a non-recognized subsequent event, the financial impact should be stated as well. Significant disclosures contractors should consider are:
- Government-mandated restrictions
- Staff reductions
- Investment losses
As this pandemic continues, it leaves many contractors wondering what lies ahead. Even though the future is unforeseeable, if contractors act now and take advantage of the resources they are given, they will be prepared. The time to begin planning is now, as it’s important for businesses to know any tax changes and filing requirements. If you have any questions, please reach out via email, give us a call at (401) 921-2000, or fill out our online contact us form.