Going Concern Uncertainty
Omitted DisclosuresA common/significant A&A topic addressed during the pandemic is the consideration of and financial reporting when substantial doubt exists about an entity's ability to continue as a going concern. The response to this issue is heightened during the pandemic because of economic challenges many organizations face. The issue is not isolated to audit clients. The accounting implications impact review, compilation and preparation of financial statement engagements.
Since 2016, when Presentation of Financial Statements — Going Concern (Subtopic 205-40) Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern first became effective, entity management has had primary responsibility for addressing this issue. But accountants performing audits and reviews are explicitly required to consider whether management’s evaluation was reasonable, whether the going concern basis of accounting is appropriate, whether conditions or events raise substantial doubt about their client's ability to continue as a going concern, the adequacy of their client's plans to mitigate those concerns, and the adequacy of the related financial statement disclosures. Accountants performing compilation or preparation of financial statement engagements are not explicitly required to perform the same steps but should not ignore the issues when they suspect their existence, as juries are likely to consider the steps implicit.
The AICPA's Guide Preparation, Compilation, and Review Engagements contains illustrative emphasis-of-matter paragraphs useful to address the going concern uncertainty in compilation reports.1 While preparation engagements do not contemplate the issuance of a report, and compilation and preparation engagements permit clients to elect to omit substantially all disclosures, it can be problematic to suitably address the going concern uncertainly when substantially all disclosures are to be omitted on preparation engagements. However, there is concern that not disclosing the going concern uncertainty would mislead financial statement users. In such instances, CAMICO is advising policyholders to modify the financial statements headers or legends to reference financial statement footnote(s) addressing the uncertainty labeled "Selected Information — Substantially All Disclosures Required by [the applicable financial reporting framework (e.g., ‘accounting principles generally accepted in the United States of America’)] Are Not Included." This approach is prescribed by professional standards when the omission of disclosures (to the accountant’s knowledge) is intended to be misleading. As intent is difficult to ascertain, CAMICO recommends following this protocol when (in the accountant’s professional judgment) financial statement users might otherwise be misled regarding the entity’s ability to continue as a going concern.
To maintain anonymity and dramatically reduce potential risk exposure, CAMICO typically discourages policyholders performing preparation engagements from issuing disclaimer reports,2 but recognizes that some accountants may prefer to use a hybrid of the rarely used disclaimer to reference selected disclosures. Ultimately, the accountant is responsible for the accountants' report and the client is responsible for the financial statements. Insist on some modification to your normal preparation engagement paradigm when your professional judgment suggests the lack of disclosure of the pandemic's impact warrants disclosure.
Defensive DocumentationYour client’s management may conclude that no material uncertainties exist requiring disclosure in their financial statements. If you do not concur, further discussion and the documentation of those discussions will be necessary. Reaching a conclusion will involve significant unbiased judgment by you and your client. If you ultimately cannot agree and suspect the financial statement presentation is likely to mislead known users, decline to issue the financial statements. These discussions and the rationale for the decision should be documented regardless of the level of service.
Clients' Adoption of Deferred Accounting StandardsLast spring, the Financial Accounting Standards Board (FASB) deferred the effective date for adopting ASC Topic 606, Revenue from Contracts with Customers, by one year for nonpublic entities that had yet to issue their financial statements – extending the effective date to annual reporting periods beginning after December 15, 2019, and interim periods within annual reporting periods beginning after December 15, 2020 (now!).
FASB also deferred the effective date for adopting its lease accounting standard for private companies. ASC Topic 842, Leases, is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Although it is not mandatory to make this standard effective now, consider advising those clients that benefited from the delay in adopting the revenue recognition standard adopt both simultaneously.
Also, CAMICO recommends including the following clause in your GAAP-basis financial statement engagement letters:
Please be advised that any consulting we provide regarding the implications of the Company’s adoption of the new revenue recognition standard pursuant to FASB ASC Topic 606, and the Company’s adoption of FASB ASC Topic 842, Leases, will require our firm to spend additional time in the performance of the services contemplated under this agreement. By your signature below, you understand and agree to accept the additional time and associated fees that may be required to address the Company’s implementation of these new standards.
Other Pandemic-Related Accounting Issues to Consider
- Accounting Estimates
- Asset Impairment
- Contract Modifications
- Fair Value Measurement
- Loan Covenants
- Revenue Recognition
- Subsequent Events
Pandemic Implications on Your EngagementThe pandemic will impact the conduct of your engagements this busy season as you and your clients continue to make health and safety accommodations. CAMICO recommends that firms communicate to clients the COVID-19 related safety protocols in place and the potential implications to the planning, timing and conduct of the services your firm will render. Such a communication can be provided in a separate client letter ("Letter 20-24 – Client Letter – Pandemic Implications to Firm Services") or embedded in the engagement letter. As such a communication is organization-specific, a firm will need to tailor the communication to address the firm's specific precautions and protocols.
Resources for FirmsThe AICPA's Technical Hotline is an excellent resource to assist its members in responding to A&A issues. Common recent issues addressed by this hotline can be found at https://www.aicpa.org/interestareas/frc/recentlyissuedtechnicalquestionsandanswers.html. Many of these nonauthoritative technical questions and answers address pandemic-related topics, including:
- Accounting for Loan Repayment or Forgiveness by the SBA,
- Borrower Accounting for a Forgivable Loan Received Under the SBA’s Paycheck Protection Program3,
- Classification of Advances Under the Paycheck Protection Program, and
- Consideration of the SBA Guarantee Under the Paycheck Protection Program
Illustrative Financial Statement DisclosuresThe AICPA and several national accounting firms have authored illustrative guidance including sample financial statement disclosures to address the pandemic’s implications. CAMICO recommends you identify publicly traded companies in the same or similar industries with the same or comparable dynamics, access their financial statements, and harvest and modify suitable language to craft financial statement disclosures appropriate for your clients’ unique needs.
Here are some sites containing examples of A&A guidance you may wish to consider:
- Center for Plain English Accounting (membership required):
- NFP Accounting for COVID-Related Funding + Other Financial Reporting Considerations
- Consequences of COVID-19: Financial Reporting Considerations
- COVID-19 Related Illustrative Disclosures
- Illustrative Public Company Disclosures (consequences of COVID-19)
- Ernst & Young's Applying IFRS: Disclosure of Covid-19 impact, October 2020
- KPMG’s COVID-19 Supplement to their Guide to annual financial statements - IFRS
- PwC Illustrative December 31, 2020 IFRS consolidated financial statements
- PwC Insight: Examples for reporting the impact of COVID-19 on going concern and subsequent events in financial statements
CAMICO's Accounting and Auditing Hotline remains a useful resource to access when addressing A&A issues including those prompted by the pandemic. Also, please reference CAMICO's COVID-19 A&A Frequently Asked Questions, available on the CAMICO Members-Only Site (www.camico.com) under Coronavirus Resources —> Other Guidance —> COVID-19 Accounting & Auditing FAQ.
CAMICO policyholders can find additional risk management information regarding the pandemic on CAMICO's COVID-19 Resource Page, available on our Members-Only Site (log-in at www.camico.com). Please visit our Members-Only Site often for updates, as we will share new information as it becomes available.
1 PDFs of Illustrative disclosures-omitted report language can be found in illustrations 4, 5 and 10 of 17 illustrative compilation reports accessible here.
2 An illustrative disclaimer might read: The accompanying financial statements of [entity name] as of and for the year ended December 31, 2020, were not subject to an audit, review, or compilation engagement by [me/us] and [I/we] do not express an opinion, a conclusion, nor provide any assurance on them. Management has elected to omit substantially all the disclosures and the display of comprehensive income required by [financial reporting framework]. If the omitted disclosures and the display of comprehensive income were included in the financial statements, they might influence the user's conclusions about the company’s financial position, results of operations, and cash flows. Accordingly, the financial statements are not designed for those who are not informed about such matters. See selected information accompanying the financial statements addressing the going concern uncertainty.
3 Before determining which of the four models is preferable, CAMICO encourages CPAs to discuss with clients their options – specifically, (1) whether their loans are eligible for forgiveness eligibility, (2) whether they anticipate being able to meet the forgiveness conditions, and (3) whether they intend to seek loan forgiveness.