Accounting, Disclosure, and Internal Control Considerations Related to
Coronavirus Disease 2019
Global responses to the coronavirus disease 2019 (COVID-19) outbreak continue to
rapidly evolve. COVID-19 has already had a significant impact on global financial
markets, and it may have accounting, disclosure, and internal control implications
for many entities. Some of the key impacts include, but are not limited to:
Interruptions of production.
Supply chain disruptions.
Unavailability of personnel.
Reductions in sales, earnings, or productivity.
Disruptions in or stoppages of nonessential business travel.
The closure of facilities and stores.
In addition, entities should consider the increasingly broad effects of COVID-19 as a
result of its negative impact on the global economy and major financial markets.
This Financial Reporting Alert discusses certain key accounting, disclosure,
and internal control considerations related to conditions that may arise as a result
of COVID-19. Although the virus was first detected in Wuhan City, Hubei Province,
China,1 it has had more far-reaching ramifications. This publication is divided into
the following sections:
Disclosure and SEC Reporting Considerations.
Internal Control Considerations.
Entities must carefully consider their unique circumstances and risk exposures when
analyzing how recent events may affect their financial reporting. Specifically,
financial reporting and related financial statement disclosures need to convey all
material current or potential effects of COVID-19. It is also critical that
management understand the risks that entities are dealing with and how such risks
may affect them. SEC registrants must also consider the need to disclose information
in other areas of an SEC filing, such as MD&A or risk factors, in addition to
the footnotes to their financial statements. Furthermore, entities may want to be
aware of, and discuss with their auditors, problems that could be encountered in
completing audits, such as:
Travel restrictions that do not allow for visits to offices in affected
areas to complete essential audit work.
The inability to prepare or provide information necessary for the audit
related to operations in affected areas (e.g., personnel may not have
access to the information because of the closure of China offices).
In a public
statement issued on January 30, 2020, SEC Chairman Jay Clayton
commented that it “may be difficult to assess or predict [the effects of COVID-19]
with meaningful precision”; however, “how issuers plan for that uncertainty and how
they choose to respond to events as they unfold can nevertheless be material to an
investment decision.” Chairman Clayton also stated that the SEC staff would “to the
extent necessary or appropriate, provide guidance and other assistance to issuers
and other market participants regarding disclosures related to the current and
potential effects of the coronavirus.”
On February 19, 2020, Chairman Clayton — in a joint public statement with SEC Division of Corporation Finance
Director Bill Hinman, SEC Chief Accountant Sagar Teotia, and PCAOB Chairman William
D. Duhnke III — updated comments from his January 30, 2020, statement on disclosures
related to the current and potential effects of COVID-19. In the February 19, 2020,
statement, Chairman Clayton emphasized “(1) the need to consider potential
disclosure of subsequent events in the notes to the financial statements . . . and
(2) [the SEC’s] general policy to grant appropriate relief from filing deadlines in
situations where, in light of circumstances beyond the control of the issuer,
filings cannot be completed on time with appropriate review and attention.” Chairman
Clayton encouraged issuers to engage directly with the SEC staff on questions about
On March 4, 2020, the SEC followed up on its prior statement by issuing an
order (the “Order”) that gives public companies an additional
45 days to file certain reports that would otherwise have been due between March 1
and April 30, 2020, if specified conditions are met. The Order follows a model that
is similar to the existing accommodations under SEC Rule 12b-25.2 To use the relief allowed by the Order, a registrant must file a current
report on Form 8-K (or Form 6-K, as applicable) that discusses, among other things,
(1) why the issuer is “unable to meet a filing deadline due to circumstances related
to COVID-19,” (2) the estimated date by which the related filing will be made, and
(3), if appropriate and material, a risk factor describing the impact of COVID-19 on
the registrant’s business. The SEC will continue to monitor the impact of COVID-19
and may extend the time period for the relief if needed.
The SEC also continued to encourage companies to evaluate their disclosure
obligations related to COVID-19 and its potential impact on securities transactions.
Because the potential effects of COVID-19 could constitute material nonpublic
information, companies should consider how their codes of ethics and insider trading
policies address, prevent, and deter trading that is based on material nonpublic
information related to COVID-19. If a company becomes aware of a material risk
related to COVID-19, it should also consider whether and, if so, when to implement
trading restrictions until it has appropriately informed investors. Further, as more
information becomes available and risks evolve, a company may need to consider
updating previous disclosures.
Connecting the Dots
The SEC’s actions reinforce the importance of maintaining audit and financial
reporting quality despite emerging issues such as COVID-19. Registrants who
are concerned that COVID-19 could negatively affect their financial
reporting quality or ability to meet SEC filing deadlines are encouraged to
proactively reach out to their auditors, legal counsel, or the SEC, as
appropriate, to consider the availability of the relief provided by the
The outbreak of COVID-19 could have a number of potential accounting implications for
entities, particularly those with subsidiaries, operations, investments, or joint
ventures in areas affected by the virus. Entities with significant suppliers,
vendors, or customers in areas affected by the virus, as well as entities that lend
to or borrow from entities in areas affected by the virus, also may experience
accounting challenges. In addition, we do not expect the potential accounting and
reporting implications to be limited only to entities with direct exposure to or
presence in areas affected by COVID-19; given the broader global economic impact of
COVID-19 on financial markets, we believe that the outbreak will also pose
increasing risks and potentially have accounting implications for all entities with
exposure to a broader economic downturn and decline in financial markets.
As COVID-19 continues to spread globally, it may be appropriate for entities to
consider the impact of the outbreak on accounting conclusions and footnote
disclosures related to, but not limited to, the following:
Asset (including goodwill) impairments.
Valuation and impairment of receivables, loans, and investments.
Valuation of defined benefit plan assets and obligations.
Stock compensation performance conditions and
Employment termination benefits.
Insurance recoveries related to business interruptions.
Lease rent concessions.
The ultimate recognition of accounting impacts related to these issues will vary
depending on each entity’s specific facts and circumstances. However, there are
certain areas of financial reporting that may be more likely to have a recognized
accounting impact as a result of the COVID-19 outbreak:
Impairment of goodwill — Entities may need to assess whether the
impact of COVID-19 has led to an asset impairment. Their financial
performance, including estimates of future cash flows and earnings, may
be significantly affected by the direct or indirect impacts of recent
and ongoing events. ASC 350-20-35-30 requires entities to perform an
impairment test if “an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount” (sometimes referred to as a triggering event); in such
cases, the applicable guidance for measuring and recognizing an
impairment loss should be followed.
Impairment of long-lived assets — ASC 360-10-35-21 states that
entities may need to evaluate whether a long-lived asset or group of
assets must “be tested for recoverability whenever events or changes in
circumstances indicate that its carrying amount may not be recoverable.”
When making this assessment, entities should consider the examples in
that guidance, including whether there has been a “significant decrease
in the market price of a long-lived asset,” a “significant adverse
change in the extent or manner in which a long-lived asset . . . is
being used or in its physical condition,” or a “significant adverse
change in . . . the business climate that could affect the value of a
long-lived asset.” As a result of the impacts of COVID-19, certain
entities may need to perform an impairment assessment of long-lived
Valuation and impairment of receivables, loans, and investments —
Given the current downturn in financial markets in many areas, entities
should consider the impacts of significant fluctuations in the value of
investments and assess them for impairment. Investments that may be
affected include equity securities and debt issued by entities that are
domiciled in an affected area and, in certain instances, investments in
sovereign debt. Moreover, events in an affected area may cause
additional volatility in the global markets, which may have an impact on
the fair values of investments that are not directly linked to affected
areas (e.g., credit spreads may widen or the creditworthiness of
counterparties may be affected). An entity’s’ selection of the
applicable impairment model, as well as the related considerations for
revaluation of receivables, loans, and investments, is based on the
instruments’ classification under U.S. GAAP (e.g., equity securities
without readily determinable fair values, available for sale and
held-to-maturity debt securities, investments in equity method
investments, and joint ventures). In some cases, the applicable
impairment model also depends on whether an entity has adopted
ASU 2016-133 related to credit losses.
Consideration of subsequent events recognition and disclosure — At
the end of each reporting period, entities should carefully evaluate
information that becomes available after the balance sheet date but
before the issuance of the financial statements relative to the
subsequent events guidance in ASC 855.4 In particular, for nonrecognized subsequent events, ASC
855-10-50-2 requires entities to disclose both “[t]he nature of the
event” and “[a]n estimate of its financial effect, or a statement that
such an estimate cannot be made,” if the absence of such disclosures
would result in misleading financial statements. The SEC’s February 19,
2020, statement further emphasized the importance of considering the
sufficiency of subsequent-events disclosures.
While financial statement disclosures as of December 31, 2019, were
primarily related to the potential impact of COVID-19 as a nonrecognized
subsequent event, we expect that there may be an increase in the
recognition of accounting impacts related to COVID-19 in future filings
(e.g., Form 10-Q for the quarter ended March 31, 2020) for matters that
become known during the subsequent-events period after the balance-sheet
date. Depending on how the ongoing spread of COVID-19 affects the
economy and financial markets, management will need to continue to
consider subsequent-events-related accounting recognition and disclosure
requirements in future reporting periods.
Disclosure and SEC Reporting Considerations
In a manner similar to the treatment of other current risks (e.g., Brexit, the
phaseout of LIBOR, or cybersecurity), entities may need to add disclosures about the
impact of COVID-19 in their SEC filings. In recent Form 10K filings for the year
ended December 31, 2019, entities most commonly provided such disclosures in one or
more of the following areas:
Risk Factors — Registrants must disclose information about the
most significant risks that apply to their company or its securities.
While many registrants may already disclose a general risk related to
issues such as potential natural disasters or pandemics, they should
also consider whether there is a need to update the risk factor to
clarify that it is no longer just a hypothetical risk and provide more
specificity about the potential impact of COVID-19.
MD&A — Registrants should disclose any known trends or
uncertainties that have had, or are reasonably expected to have, a
material favorable or unfavorable impact on revenues or income.
Registrants that are materially affected by COVID-19 should include
MD&A disclosures related to the current and potential future impact
on their operations, financial condition, or liquidity. Such disclosures
could provide (1) early-warning signals to investors that revenue growth
or profit margins may not be sustainable because of the impact of
COVID-19, (2) information about when and under what conditions
impairments or other charges may be incurred in the future, or (3) both.
Footnotes to the financial statements — As discussed earlier, if
issues related to COVID-19 materially affect entities’ accounts, U.S.
GAAP may require them to provide subsequent-events disclosures related
to the potential impact of COVID-19 in their financial statements as
well as to provide other account-specific disclosures.
While these disclosures would most often be included in a Form 10-K or Form 10-Q,
many registrants have also provided disclosures of the potential impact of COVID-19
in a Form 8-K related to their earnings release, specifically with regard to the
potential impact on revenue and earnings guidance for future periods.
In determining the nature and extent of the disclosures needed, registrants should
consult with legal counsel and consider potential issues such as:
Store or facility closures.
Loss of customers or customer traffic.
The impact on distributors.
Supply chain interruptions.
Production delays or limitations.
The impact on human capital.
The risk of loss on significant contracts.
Registrants should also consider providing disclosures about their controls and
procedures related to emerging risks. At the 2019 AICPA Conference on Current SEC
and PCAOB Developments, Chief of the SEC’s Division of Corporation Finance’s Office
of Trade and Services Mara Ransom emphasized that if companies expect the impacts of
evolving risks to be material, they should consider providing disclosures to address:
How management assesses the risks.
What management is doing to mitigate and manage the risks.
The board’s role in risk oversight.
Internal Control Considerations
Because of the impact of COVID-19, entities may need to implement new internal
controls or modify existing ones. Any changes in internal controls that have
materially affected, or are reasonably likely to materially affect, entities’
internal control over financial reporting must be disclosed5 in Item 4 of Form 10-Q or Item 9A of Form 10-K, of entities’ quarterly or
annual filings, respectively (or Item 15 of Form 20-F for foreign private
Entities will need to consider the operating effectiveness of controls, including
assessing any breakdown in review-type controls or the inability of individuals to
perform control duties because of absences (e.g., due to employee illness or the
closure of affected offices). Entities should also consider how a lack of
information may affect management’s ability to effectively operate controls (e.g.,
personnel may not be available in offices in China or other affected areas to
provide information that is essential to the effective operation of an internal
control). If an existing control cannot be performed, management may need to
identify alternative appropriately designed controls to compensate for the lack of
Entities should also consider management’s ability to complete its financial
reporting process and prepare its financial statements on a timely basis. Delays in
closing the underlying financial records may increase the potential for error in the
financial statements and merit the use of new or modified controls to offset the
increased risk of potential financial statement error. In addition, entities will
need to ensure that they have properly designed and implemented controls related to
the selection and application of GAAP for the accounting and disclosure issues
arising from COVID-19.
Looking ahead, we expect the impact of COVID-19 on the global economy and financial
markets to continue evolving. Entities should evaluate the related accounting issues
and disclosure considerations discussed above as facts and circumstances change.