Disruptions from the Coronavirus are leaving a mark on accounting and financial reports. Recently, PJ Patel was featured in Bloomberg Tax as part of a focus on a number of potential financial statement impacts as business disruptions have already impacted earnings for some companies. One observer notes “this is probably the most challenging time that global companies have had in the area of accounting and taxation.”
VRC has been in conversations with its private and public company clients about quarterly impairment testing. The immediate conundrum facing business entities and valuation professionals alike lies within the timing, with the trough occurring just near the end of March. As we sit on the finish line for the first quarter of 2020, it appears likely that too many unknowns exist to determine if a need for impairment testing is present now. If, however, this economic disruption continues well into the second quarter and becomes a much longer-term concern beyond what many hope is only an economic pause, then a Q2 impairment test may certainly be warranted if future cash flows are affected.
The financial impact from the virus could be assessed as a triggering event if a significant deterioration in economic conditions occurs for companies that are operating overseas. “All the optimism from announcing the original deal can evaporate when the markets slide,” said Patel. “The markets being down and then less business activity will result in lower earnings, which then could cause companies to say, ‘Our outlook has changed’.”
A sustained downtrend in market prices could trigger the need for companies to also consider impairment testing of long-lived and indefinite-lived intangible assets.
Setting the unpredictability and “what if’s” aside, assessing the emergence of facts from current events related to COVID-19 will be most reliable in determining if a triggering event occurred and when a formal impairment review will be a necessity, particularly for companies currently trading below book value.
Is COVID-19 a Triggering Event?
Watch a segment from VRC’s recent webcast, as PJ Patel and Larry Van Kirk share important insight into recent conversations they’ve had with public and private company clients in determining if the novel Coronavirus is a triggering event that will lead to a requirement for goodwill impairment testing in Q1 or Q2 2020.
COVID-19 Disruptions to Leave Mark on Financial Reports
Effects of the Coronavirus to show in risk factors, revenue, goodwill impairments, and other areas of financial reporting.