The sky might not literally be falling, but it sure feels like it is. As the world grapples with the escalating impact of the coronavirus pandemic, a stark realization is now sweeping over accounting and finance teams — they’re the ones who have to figure out how countless uncertainties fit into their reporting and GAAP.
And to throw even more regulatory salt into the wound, they don’t have a lot of time to do it. Q1 closing is already underway, so besides treading in uncharted waters, financial leaders are also very much on the clock. But as teams roll up their sleeves to try to make sense of it all, they can save CFOs and CAOs many sleepless nights by keeping some key incremental requirements and considerations in mind.
Speaking of sleepless nights, inaccurate forecasting just might be every CFO’s worst nightmare. However, with so much uncertainty invading nearly every aspect of operations, a relatively routine exercise like a cash flow estimate has suddenly become a daunting task.
Obviously, impairment is going to be a significant factor, but certainly not the only one. Income tax valuation allowances, going concern assessments, and compliance with loan covenants, amongst others, will also be critical considerations.
As a best practice, many companies are running multiple cash flow scenarios, applying probability weighting to best, worst and middle-of-the-road assumptions to account for uncertainty in their analyses.
While this strategy is in no way ideal, it’s becoming more common as companies look for ways to balance accuracy and uncertainty while forecasting for an income approach to valuations. Companies opting for this route will likely need a valuation specialist for an independent assessment of a market approach, using it as a comparison against the income approach.
Heightened technical analysis requirements
Many companies — perhaps even most — will need to fine-tune their technical accounting skills...
To continue reading the rest of this article or watch the video interview click here.