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COVID-19: Accounting Issues Lurk in Operational Decisions

As the economy begins to reopen and businesses continue to assess the overall impact of the shut-down earlier in the year, there may be hidden accounting issues as a result of operational decisions. Consider the following:

  • Have sales declined significantly and have certain product lines been discontinued?
  • Has an organization reduced its workforce or has intellectual property been abandoned?

For instance, if a product line has been discontinued, fixed assets and inventory associated with those product lines may need to be written off or written down depending on the circumstances. If there has been a reduction in a company’s real estate footprint, the termination of leases could include penalties and other costs that will need to be recorded.

If a company has goodwill or other intangible assets, accounting rules would require an entity to determine if an impairment charge has occurred based upon these triggering events. Triggering events include the loss of significant customers, significant declines in a business, as well as consideration of macro events on a company’s overall operations. As a result of the recent pandemic, a company will need to consider how these factors have impacted the value of a company’s goodwill and intangible assets.

A decline in the overall workforce as part of the pandemic may have triggered certain accounting implications. Was the reduction in workforce permanent, and if so, were they offered additional benefits as part of their termination? Was a formal plan to reduce the workforce enacted. These factors as well as others should be analyzed to determine if the company developed a restructuring plan under accounting rules. This may trigger additional expense and disclosure within a company’s financial statements. One other factor with significant layoffs lurks within employee benefit plans. Under certain conditions, a significant decline in an employee benefit plan may result in a curtailment event to the plan. This would probably result in an unintended accounting consequence based upon operational decisions that are being made.

The ability to identify accounting ramifications as a result of operational decisions is important for ensuring that there are no surprises as part of the year-end financial statement process. At The Bonadio Group, we’re constantly reimagining our service offerings to help our clients meet their business goals. Our Bonadio Strategic Advisory (BSA) team is here to help you. Visit our webpage today to learn more.

The information and advice we are providing for this matter relates to COVID-19 legislative relief measures. Because legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that could modify some of the advice and information provided to you, after the conclusion of our engagement. We, therefore, make no warranties, expressed or implied, on the services provided hereunder.