Question

Discuss three (3) accounting and financial reporting risks and their implications that have been heightened by the current pandemic situation. At least 2 relevant accounting standards (IASs /IFRSs) must be incorporated in your discussion. Please Explain them

Answer 1

Accounting and Financial Reporting Risk

Business decisions are driven by numbers. If the numbers lack integrity, Management cannot trust that they are taking decisions in robust Financial Information and therefore any plans put in place are built on shaky ground.

Accounting Risk refers to a Financial Statement that do not show a True and Fair view of Financial Position and Profitability of a Company.

Financial Reporting can be grouped into three major components:

• A variety of people responsible for extracting, assembling, aggregating, and analyzing data

• The processes and timelines by which this data is obtained and reported

• The systems that crunch the financial information and distill it into meaningful form

Characteristics of each of these Financial Reporting components can be a potential weakness that increases Financial Reporting Risk or a possible strength that reduces Financial Reporting Risk.

Example:

An Accountant not aware of the Accounting Principles affecting the Company, Transactions may be misstated during the monthly or quarterly or yearly book closing process.

Where the Company is not following the most recent and applicable authoritative Guidance, the Company may file Financial Statements that are not in accordance with applicable Accounting Standards.

An incorrect Accounting treatment may result in a transaction not being in-accordance with the applicable Laws and Regulations.

Current (Pandemic) Situation:

The COVID-19 pandemic is affecting major economic and financial markets, and virtually all industries and governments are facing challenges associated with the economic conditions resulting from efforts to address it.

Throughout the Pandemic, the SEC has emphasized the need for entities to provide transparent disclosures regarding the impact of Covid-19 on their ongoing Financial and Operating conditions.

My Research / Study & Understanding

Credit Losses: The disruption caused by Covid-19 has placed pressure on issuers’ implementation of Accounting Standards Codification (ASC) 326, which governs accounting for Credit Losses, in two important ways. First, the virus has led to uncertainties in forecasting the collectability of debts as the global economic environment slows. While the rule does not require the use of any particular method to determine a company’s allowance for credit losses, accounting professionals are counseling conservative, valuation-based approaches to determine the creditworthiness of borrowers. Second, the CARES Act, signed into law on March 27, 2020, provides limited relief for certain insured depository institutions, bank holding companies, their affiliates, and credit unions regulated by the National Credit Union Administration. Under the law, covered entities may delay their implementation of ASC 326 until the earlier of Dec. 31, 2020.

Revenue Recognition: Similar to Credit Losses, potential impediments to collectability due to the disruption caused by Covid-19 may require entities to reassess their receivables and related revenue recognition under ASC 606, even for customers that have a strong credit history. Additionally, variable consideration, such as agreed upon price concessions, discounts, or returns, may be constrained due to the pandemic’s disruption, thereby requiring a reduction in revenues.

Asset Impairments: In its recent guidance, the SEC’s Division of Corporation Finance urged companies to consider whether Covid-19 might affect certain assets on their balance sheets and their ability to timely account for those assets. In particular, the guidance advised Companies to evaluate whether they need to change any of the judgments that underlie their valuation of assets under GAAP or IFRS, and whether they should disclose material impairments to assets such as goodwill, intangibles, inventories, financing receivables, and investment securities. With respect to goodwill in particular, companies should carefully monitor the ongoing impact of Covid-19 on their business and consider whether that impact represents a triggering event. Examples of potential triggering events include a sustained decrease in share prices due to the resulting economic downturn, limitations on access to capital, cost increases, and changes in management and key personnel.