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20-2, Financial Reporting Considerations Related to COVID-19 and an Economic Downturn (March 25, 2020; Last Updated July 1, 2020)

Financial Reporting Alert 20-2
March 25, 2020; Last Updated July 1, 2020
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Financial Reporting Considerations Related to COVID-19 and an Economic Downturn

This document was updated on July 1, 2020, to reflect (1) the issuance of a second statement by SEC Chief Accountant Sagar Teotia on the continued importance of high-quality reporting in light of the coronavirus disease 2019 ("COVID-19") pandemic; (2) the issuance of CF Disclosure Guidance Topic No. 9A by the SEC's Division of Corporation Finance; (3) a statement by the SEC that COVID-19-related deadline relief would not be extended beyond the previous July 1, 2020, expiration date; and (4) expanded guidance on the use of non-GAAP measures for COVID-19-related adjustments. Content that has been added or amended in this update (or in previous updates to this publication) has been marked throughout the document with a boldface italic date in brackets. Appendix E lists the sections that contain those additions or amendments.


Securities Exchange Act of 1934, Rule 12b-25, “Notification of Inability to Timely File All or Any Required Portion of a Form 10-K, 20-F, 11-K, N-CEN, N-CSR, 10-Q, or 10-D.”
CF Disclosure Guidance Topic No. 9, Coronavirus (COVID-19).
CF Disclosure Guidance: Topic No. 9A, Coronavirus (COVID-19) — Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources.
FASB Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
ASC 275-10-50-6 requires entities to disclose “discussion of estimates when, based on known information available before the financial statements are issued or are available to be issued , . . . it is reasonably possible that the estimate will change in the near term and the effect of the change will be material.” (For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”)
FASB Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment.
For more information on assessing the reasonableness of an implied control premium, see the AICPA’s Accounting and Valuation Guide Testing Goodwill for Impairment (2013) and the Appraisal Foundation’s Valuations in Financial Reporting Valuation Advisory 3: The Measurement and Application of Market Participant Acquisition Premiums (2017). [Footnote added April 24, 2020]
For more information, see the remarks by then SEC Professional Accounting Fellow Robert G. Fox III at the 2008 AICPA Conference on Current SEC and PCAOB Developments. [Footnote added April 24, 2020]
FASB Accounting Standards Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments — Credit Losses.
SEC Staff Accounting Bulletin (SAB) Topic 5.Y, “Accounting and Disclosures Related to Loss Contingencies.”
Quoted text transcribed from the FASB’s meeting.
Entities should consult with their accounting advisers regarding the acceptability of the model applied to account for the concession when not applying the modification framework.
FASB Staff Q&A, Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic.
International Financial Reporting Standard (IFRS) 16, Leases.
In all scenarios, a lessee should evaluate whether there is an impairment indicator for its ROU asset. See Section 8.4.4 of Deloitte’s A Roadmap to Applying the New Leasing Standard for additional guidance on impairment of an ROU asset.
In remeasuring the lease liability, the lessee should remeasure other variable lease payments that are based on an index or a rate by using the index or rate on the remeasurement date.
The ROU asset cannot be reduced below zero; any excess would be recognized in net income.
Monthly straight-line expense of $11,750 is determined on the basis of total lease payments of $423,000 over the noncancelable lease term of 36 months.
In our description of this approach, we have assumed that the collectibility of lease payments remains probable after the rent concession. For more information about a lessor’s assessment of collectibility in light of COVID-19-related concessions, see the Collectibility section and Section of Deloitte’s A Roadmap to Applying the New Leasing Standard.
Similarly, the determination of whether a reporting entity should consolidate a voting interest entity (i.e., a legal entity that is not a VIE) is also a continual process. That is, the reporting entity should monitor specific transactions or events that affect whether it holds a controlling financial interest.
An equity method basis difference is the difference between the cost of an equity method investment and the investor’s proportionate share of the carrying value of the investee’s underlying assets and liabilities. The investor is required to account for this basis difference as if the investee were a consolidated subsidiary. See Section 4.5 of Deloitte’s A Roadmap to Accounting for Equity Method Investments and Joint Ventures for further discussion of equity method basis differences.
Earnings before interest, tax, depreciation, and amortization.
An entity is required to make an entity-wide policy election for both employee awards and nonemployee awards to either (1) estimate forfeitures or (2) recognize forfeitures when they occur.
SEC Staff Accounting Bulletin Topic 14.D.1, “Certain Assumptions Used in Valuation Methods: Expected Volatility.”
EITF Issue No. 01-10, “Accounting for the Impact of the Terrorist Attacks of September 11, 2001.”
See ASC 958-605-15-6(d).
For titles of IFRS Standards, see the list on the IFRS Web site.
FASB Proposed Accounting Standards Update, Government Assistance (Topic 832): Disclosures by Business Entities About Government Assistance.
For titles of and links to SEC Regulation S-X rules, see the e-CFR Web site.
However, to the extent that an entity concludes that a nonoperating gain or loss is COVID-related, we would expect the gain or loss to remain a nonoperating item (i.e., the classification as “COVID-related” does not change the characteristic of the gain or loss as operating versus nonoperating).
For example, as a result of the deemed repatriation transition tax in the Tax Cuts and Jobs Act of 2017.
Reporting entities that apply the equity method to account for investments in common stock or in-substance common stock on the basis of having the ability to exercise significant influence over operating and financial policies of the investee may need to assess the specific facts and circumstances of a bankruptcy by an equity method investee to determine whether they continue to meet the criteria to apply the equity method (e.g., continue to have significant influence over an investee during bankruptcy).
For SEC filers that do not meet the definition of a smaller reporting company (SRC), CECL is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For all others, CECL is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, is permitted. See Section 9.1.1 of Deloitte’s A Roadmap to Accounting for Current Expected Credit Losses for the definition of an SEC filer and SRC. Section 4014 of the CARES Act also provides an optional deferral for certain qualifying entities (see Deloitte’s Heads Up, "Highlights of the CARES Act," for further information). [Footnote amended April 13, 2020]
A financial institution is not a defined term in the CARES Act or GAAP. Entities may need to discuss with their legal counsel whether they are within the scope of Section 4013 of the CARES Act.
The applicable period for loan modifications means the period beginning on March 1, 2020, and ending on the earlier of (1) December 30, 2020, or (2) the date that is 60 days after the termination date of the national emergency declared by President Trump under the National Emergencies Act on March 13, 2020, related to the outbreak of COVID-19.
Although the interagency guidance applies to financial institutions regulated by the agencies that issued it, because the guidance was developed in consultation with the FASB staff, which concurred with the approach, we believe that nonfinancial institutions may also elect to apply the guidance.
Under the CARES Act, a modification may include a forbearance arrangement, an interest rate modification, a repayment plan, and any other similar arrangement that defers or delays the payment of principal or interest.
This would apply only if the lender had no option to avoid granting the modification.
We believe that two three-month consecutive delays, for example, could be acceptable.
SEC Staff Accounting Bulletin Topic 12.D, “Application of Full Cost Method of Accounting.”
SEC Codification of Financial Reporting Policies, Section 406.01.c, “Full Cost Method.”
Under U.S. GAAP, there is no explicit guidance related to government grants or other forms of government assistance, other than industry guidance for not-for-profit entities.