As a business, how do you prepare for the unexpected? What steps can you take to ensure that your operations keep chugging along, at least as well as possible? Well, it depends on the nature of the disruption, where something like the coronavirus has the potential to turn your operations upside down for an extended amount of time.

For that reason, we're going to take a look at some common considerations that companies should think about in the face of the coronavirus, particularly from a technical accounting perspective. As always, every organization is different, so it's important to see how the impact of the outbreak affects your specific company. Still, a handful of particular points are very good places to start.

A Far-Reaching Crisis

From an accounting perspective, a burgeoning crisis like the coronavirus can disrupt your company from many different angles – limited or suspended operations, travel restrictions, even quarantine measures. And while the growing outbreak hits some industries harder than others – tourism & hospitality, transportation, retail, and entertainment all being directly in the crosshairs – no sector is entirely safe.

Further, your response to any significant disruption in operations, whether from an outbreak like the coronavirus, a natural disaster, or any number of external variables, depends on several different factors, not the least of which are the various accounting considerations possibly involved.

To make matters even more complicated, you're most likely getting ready for your March-end interim reporting right about now. So to help you sort through all of it, we're going to discuss the most common considerations for both accounting and disclosure purposes.

Asset Impairments

This area could include business interruption as well as other operational issues related to the coronavirus that don't necessarily result in suspended operations. Either way, they could have a significant effect on your expected current and future cash flows from operations. These impacts might be considered a "triggering event" that requires assessment for impairment. Other examples of triggering events as outlined in ASC 360 could include:

• A significant decrease in the market price of a long-lived asset or asset group
• A significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition
• A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group
• An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group
• A current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

A careful evaluation of your specific facts and circumstances will determine whether an impairment indicator is present, including assumptions of future cash flows to determine whether the carrying value of assets subject to impairment are recoverable. When assessing an asset or asset group for impairment – including long-lived assets and goodwill – you should factor impacts of the business interruption or operational issues into your key assumptions. For example, this could include demand changes in revenue growth, a disruption to your supply chain, and any impacts on the use of your workforce.

Long-Term Debt and Liquidity

The impact of the coronavirus may also affect your ability to meet your debt obligations, perhaps even certain financial covenants where applicable. In these instances, you might have to amend your debt with your lenders, which, as a result, can have accounting implications concerning troubled-debt restructuring or modification vs. extinguishment accounting under ASC 470.

Restructuring and Exit or Disposal Events

The current crisis might also force you to restructure your business, including employee and contract terminations or even closure or relocation of your company's operations.

Also, you might need to record a liability for exit or disposal costs associated with qualifying events under ASC 420, with the exception of termination of leases accounted for under ASC 842. The liability is usually recorded at fair value in the period it is incurred. Remember, a commitment to a restructuring plan doesn't warrant recognition of an exit or disposal liability. Also, if you're forced to only temporarily vacate a facility, those expenses don't qualify as an exit or disposal cost.

Revenue & Receivables

Business interruptions or disruptions in your operations may call into question the likelihood of collecting revenue if your customers can’t make payment. If you continue to sell goods or services under those circumstances, then you should not record the revenue for new sales if collection isn't probable.

Likewise, you should consider if your existing receivables from past sales to customers impacted by the coronavirus, as well as your estimate around allowances for doubtful accounts, need revision. For example, impacted customer receivables may require a partial or full reserve or, in some cases, a full write-off.

Inventory

Consider inventory valuation and reserves assumptions for recording inventory at the lower of cost or net realizable value. In addition, while this may be more relevant in manufacturing environments, the impacts on production levels can have implications on capitalization of inventory costs. For example, if production declines or becomes idle altogether, a company should consider whether or not to still allocate excess fixed overhead costs to inventory. When production is no longer considered “normal”, excess overhead costs should be expensed as incurred.

Risks and Uncertainties

Recent events might require you to include additional disclosures discussing the related risks and uncertainties concerning the coronavirus and its impact on your business. These disclosures could include specific implications to the company itself or ancillary effects on the operations of others, including your customers and suppliers.

Also, the impact of the coronavirus to disclosures outside of your financial statements might be relevant for SEC filers in their MD&A. This would include additional updated discussion of your business risk factors and any potential liquidity issues.

Business Interruption Coverage

This particular area requires a caveat since not all companies have business interruption insurance and, even for those that do, the policies don't necessarily cover damages from the impact of the coronavirus. Therefore, we suggest you evaluate any insurance coverage to determine if you can file claims due to recent events.

Some policies might cover loss of gross profit or the reimbursement of certain expenses while you, as a reporting entity, cannot conduct your business as usual. Some policies might even provide some relief to you to cover interruption at the customer or supplier levels, particularly when such risks are highly concentrated. Once again, you need to carefully look at your policies to see if you qualify for a valid claim.

Insurance Recoveries for Business Interruption Claims

If you do find that you qualify for insurance recoveries from lost profits or revenue, the accounting for these recoveries follows the gain contingency model under GAAP. That term, gain contingency, speaks to circumstances where you expect to recover a loss not yet recognized in your financials.

Alternatively, it could also mean that you expect to recover an amount in excess of any loss you already recognized in your financial statements. However, if you've already recognized a loss in your statements, then any recovery up to that amount already recognized isn't a gain contingency under GAAP.

When the insurance recovery does represent a gain contingency, then the timing of recognition depends on your assessment of the enforceability of the claim covered by the insurance policy. You cannot record any recoverable if the coverage is in dispute or if the policy does not clearly determine a reimbursable amount.

Typically, you do not recognize a business interruption recovery gain before your insurance carrier acknowledges that it's a valid claim covered under your policy. If there is any hint of uncertainty thanks to ongoing disputes about the claim, then you should not record any gain until you know the actual proceeds from the claim or, in some instances, actually receive those proceeds from the carrier. To put it another way, don't record a gain contingency until you realize it.

Other Areas of Impact to Consider

While those preceding areas are the most common for businesses impacted by the coronavirus, there are a couple less common ones to keep in mind as well.

• For going concern, the evaluation of whether substantial doubt exists regarding an entity's ability to operate as a going concern is performed on both an annual and interim basis.
• If you're hedging, consider whether forecasted cash flow transactions would be expected to occur and if the underlying derivative instrument will continue to meet the measurement and assessment hedge criterion.
• Consider if any impairments would be recorded for equity method investees.

Overall, take into consideration any evaluation of future income forecasts that would result in reductions of your cash flows from:

• The valuation allowance for deferred taxes
• Assessing probability of financial performance targets for stock compensation
• As previously mentioned when we discussed asset impairment, goodwill impairment valuation assumptions

The key takeaway here is to start thinking about updating estimates as a result of the coronavirus that you expect to have a material impact on your operations.

The SEC to the Rescue

On March 25, 2020, the SEC provided additional relief to registered companies impacted by the coronavirus for certain filings. This relief supersedes a previous order and gives affected businesses another 45 days to file their Exchange Act filings – 10-K, 10-Q, etc. – that would otherwise have been due between March 1 and July 1, 2020.

To qualify for this new relief, impacted registered companies must file with the SEC by the later of March 16, 2020, or the original filing deadline. Also, the filing for relief must include:

• A statement that the company is relying on the relief order by the SEC for the coronavirus outbreak
• A description of why the company cannot file its regulatory filings in a timely fashion
• An estimated date of when the company expects to file its impacted regulatory filings
• A risk factor describing the impact of the coronavirus outbreak, if such an impact is material to the business

Thankfully, the SEC is assisting companies on a case-by-case basis for filing requirements as described in the relief order, also leaving the door open to additional extensions as needed.

We understand that much of this – perhaps even most of it – is confusing, frustrating, and overwhelming, particularly if your people and business have been affected by this crisis. Of course, Embark is always here to help you sort out what these considerations mean for your company. But above all else, we want you and your people to remain healthy and safe in these uncertain times.