As we move into 2021, the COVID-19 pandemic continues to impact our way of life and, subsequently, our businesses. Not surprisingly, it continues to impact different businesses—and even different lines of business—in varying ways. Some businesses are having trouble keeping products in stock. Others, such as many within the hospitality industry, are struggling to keep the doors open.
Considering this, it’s important to take a closer-than-usual look at your 2020 financial statements. Not only can this ensure your statements are accurate, but it also gives you a clearer picture of how COVID has impacted your business. Here are a few things to keep in mind as you review yours.
Give certain areas an extra dose of scrutiny
COVID has far-reaching fingers. It’s possible areas of your business (and subsequently, your accounting) you assumed were safe from its impacts have been affected. Think about it: Your accounts receivable may be impacted by customers who went out of business. An extended closure could cause you to be carrying obsolete inventory. Modifications to debt or lease agreements could require you to do some unique accounting.
So, if you’re using generally accepted accounting principles (GAAP) framework for your financial statements, be sure to closely review these areas:
- Accounts receivable valuation
- Inventory valuation
- Lease modifications
- Debt modifications
- Debt covenant compliance
- Changes in estimates
- Revenue recognition (revisions in the application of ASC 606)
- Risks, uncertainties, concentrations, and contingencies
- Going concern analysis
- Subsequent events
Did you receive a Paycheck Protection Program (PPP) loan?
If so, when will you recognize the loan forgiveness income and remove the debt from your balance sheet? There is no specific GAAP guidance for PPP, which means you can choose between various models. Of course, this leaves room for judgment and interpretation; the model you use will impact the timing of recognizing PPP loan forgiveness income.
And what about the tax implications associated with PPP loans? At the moment, this guidance continues to evolve. We are regularly monitoring it and updating our clients accordingly.
Is GAAP the best framework for you?
GAAP is meant to be all-inclusive—i.e., used by businesses ranging in size from small to Fortune 500. But GAAP can be cumbersome. Thankfully, it’s not the only option for presenting your financials. Other frameworks you can use include tax basis, cash basis, and FRF for SMEs. The framework that’s best for you depends on your business, industry, and what the users of your financial statements need.
Don’t skip disclosures
Regardless of the framework you choose, be sure to include disclosures. Explaining items in your financial statements is key to enabling users of your financials to fully understand your business. Disclosures become especially important in times of change and uncertainty. Use them to clarify how COVID has impacted your business, including the model used for reporting PPP loan forgiveness income.
Take an eagle-eyed look at your financials ASAP
If you haven’t already, be sure to inspect your financials to ensure they’re accurate despite any COVID impacts. If you have questions about the reporting options available or would like assistance scrutinizing your financial statements, JAK can help. Contact us today.