20-2, Financial Reporting Considerations Related to COVID-19 and an Economic Downturn (March 25, 2020; Last Updated January 11, 2021)

While the SEC has continually encouraged public companies to provide timely, high-quality information, it has also acknowledged that there may be instances in which registrants need additional time to gather that information. Consequently, on March 25, 2020, the SEC issued an order (the “Order”) that gave public entities that meet certain conditions an additional 45 days from the original due date to file certain reports that would otherwise have been due from March 1 to July 1, 2020. On June 26, 2020, the SEC issued a joint statement indicating that with respect to the Order, the Division of Corporation Finance believed that “further extension of this relief [was] unnecessary” beyond the July 1, 2020, expiration date. Registrants that continue to be 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.

In addition to the Order, the SEC’s Division of Corporation Finance issued CF Disclosure Guidance Topic 9.1 ("DG Topic 9"). That guidance states, in part:

On June 23, 2020, the SEC’s Division of Corporation Finance issued DG Topic 9A2 as a supplement to DG Topic 9. DG Topics 9 and 9A provide disclosure and other considerations associated with the evolving impact of COVID-19, including guidance on earnings releases, non-GAAP measures, and material nonpublic information (see separate discussions below).

The SEC has also provided the following COVID-19-related relief and guidance:

• Material nonpublic information — Because the potential effects of COVID-19 could constitute material nonpublic information, entities should consider how their codes of ethics and insider trading policies address, prevent, and deter trading that is based on such information. If an entity 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, on March 23, 2020, Stephanie Avakian and Steven Peikin, co-directors of the SEC’s Division of Enforcement, issued a statement emphasizing that it is important for public companies “to be mindful of their established disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD and selective disclosure prohibitions to ensure to the greatest extent possible that they protect against the improper dissemination and use of material nonpublic information.”
• Investment funds and advisers — The SEC issued two additional orders that give investment funds and advisers (1) relief related to the Investment Company Act of 1940 (which applies at least until December 31, 2020) and (2) relief related to the Investment Advisers Act of 1940 (which applied for reports due on or before June 30, 2020). The relief covers in-person board meetings and certain filing and delivery requirements.
• Proxy rules and annual shareholder meetings — The SEC published guidance to help public companies, investment companies, shareholders, and other market participants affected by COVID-19 comply with federal proxy rules for upcoming annual shareholder meetings by using technology, including virtual meetings, and the "notice-only" proxy delivery option. The SEC also issued C&DI 104.18 to clarify that in circumstances in which the filing of a definitive proxy statement is delayed, public companies may apply the Order to obtain deadline relief by filing a Form 8-K on or before July 1, 2020, and within 120 days of their year-end.
• Manual signatures and submission of paper documents — On March 24, 2020, the SEC staff issued a statement acknowledging that registrants may have difficulty obtaining manual signatures before filing electronically with the SEC. The statement also gives registrants certain conditional accommodations regarding such requirements in SEC Regulation S-T. Further, the SEC staff issued a statement on April 23, 2020, that allows certain forms that generally must be mailed to the SEC to be submitted electronically. Both statements may be applied until the SEC staff rescinds the guidance, with at least a two-week notice period.

To date, the SEC has issued over 50 different statements, orders, and pieces of interpretative guidance. For more information about the above actions as well as other SEC responses to COVID-19, see the SEC’s COVID-19 Response Web site.

In addition to discussing the impact on historical results, registrants are also expected to disclose in accordance with SEC Regulation S-K, Item 303, “any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact” on their financial condition, results of operations, or liquidity. These forward-looking disclosures are especially critical in connection with events such as the COVID-19 pandemic and the related economic uncertainty. Such disclosures can give investors an “early warning” about risks such as (1) when and under what conditions charges may be incurred in the future and the potential magnitude of such charges, (2) when revenue growth or profit margins may not be sustainable because of underlying economic conditions, or (3) when the registrant may be unable to comply with debt covenants or have other liquidity issues. As a result of the COVID-19 pandemic, liquidity may be significantly affected given the potential disruptions to normal levels of revenues and operating cash flows as well as to access to cash through debt or equity markets. In their MD&A disclosures about liquidity, registrants should consider discussing their working capital or other cash flow needs, anticipated changes in the amount and timing of cash generated from operations, the availability of other sources of cash along with potential limitations associated with accessing such sources, and the possible ramifications of their inability to meet their short- or long-term liquidity needs.

 

Connecting the Dots

[Added July 1, 2020]

DG Topic 9A was issued, in part, on the basis of the SEC’s assessment of how companies have disclosed the effects of and risks associated with COVID-19 to date and, as discussed above, focuses strongly on liquidity, capital resources, and going-concern considerations. The guidance in DG Topic 9A encourages registrants to include material disclosures in MD&A as well as in earnings releases. As a result, we expect that the SEC will continue to focus on these disclosures in future filings.

Early-warning disclosures should also be considered by management in connection with accounting areas that require significant judgment, such as contingencies, valuation allowances, or potential impairments. These account-specific disclosures are frequently included as part of the critical accounting estimates section of MD&A, as discussed (with respect to goodwill impairment) in Section 9510 of the SEC’s Financial Reporting Manual. Given the uncertainty associated with COVID-19, there is likely to be a substantial increase in the level of judgment entities need to apply in estimating future results and the potential range of reasonably likely outcomes. Registrants should therefore consider expanding their disclosures about (1) the key assumptions used in their most significant estimates and (2) the sensitivity of such estimates to changes that could reasonably occur as events associated with COVID-19 continue to develop. Consequently, registrants should consider updating, in their quarterly report on Form 10-Q, the critical accounting estimates previously disclosed in the Form 10-K to the extent that there have been material changes to key assumptions and estimates.

MD&A disclosures are typically included in a Form 10-K or Form 10-Q, but due to the rapidly evolving impact of COVID-19, registrants may also file current reports on Form 8-K to update investors on the current and potential future impact of COVID-19 on their business. Many of these filings have also announced that registrants are withdrawing or updating previously issued guidance related to expected 2020 revenue and earnings targets.

Registrants may also consider reflecting various impacts of COVID-19 in their non-GAAP measures. DG Topic 9 notes that if a registrant elects to do so, “it would be appropriate to highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.” When using non-GAAP financial measures, a registrant must be aware of certain SEC requirements, including the rules in SEC Regulation G and in SEC Regulation S-K, Item10(e). In addition, the SEC staff has published a number of compliance and disclosure interpretations, which are updated periodically, to clarify its views on many non-GAAP presentation issues. The key requirements for disclosure of non-GAAP information in SEC filings, including press releases, are related to the following:

• Prominence — The most directly comparable GAAP measure should be presented with equal or greater prominence.
• Reconciliation — Registrants should present a quantitative reconciliation of the non-GAAP measure to the most directly comparable GAAP measure and should transparently describe all adjustments. In DG Topic 9, the SEC staff stated that if complete GAAP financial information is not available at the time of an earnings release because of on-going consideration of matters related to COVID-19, the staff would not object to a registrant’s reconciliation of non-GAAP financial measures to the most directly comparable preliminary GAAP measure that reflects either “provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.” This position is limited solely to non-GAAP measures that have been provided to a registrant’s board of directors to report financial results and does not apply to filings on Form 10-K or 10-Q. When relying on this position, a registrant “should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.”
• Clear labeling — Registrants should clearly label and describe non-GAAP measures and adjustments but should not, for example, use titles or descriptions that are either vague or confusingly similar to those used for GAAP financial measures. For example, instead of describing an adjustment as “Effects of COVID-19,” a registrant should specify what the adjustment includes.
• Usefulness and purpose — Registrants should disclose why they believe the non-GAAP measure provides useful information to investors and, to the extent material, a statement disclosing how management uses the non-GAAP measure.

In addition to the prominence, reconciliation, clear labeling, usefulness, and purpose of such measures, an overarching theme of the guidance is that they should not be misleading, regardless of whether the measures are used in a filing (e.g., Form 10-K) or elsewhere (e.g., press release). As described in Section 100 of the C&DIs, non-GAAP measures that could potentially mislead investors may include those that:

• Exclude normal, recurring cash operating expenses necessary for business operations.
• Are presented inconsistently between periods (e.g., adjusting for an item in the current reporting period but not doing so for a similar item in the prior period without appropriately disclosing the change and explaining the reasons for it).
• Exclude certain nonrecurring charges but do not exclude nonrecurring gains (e.g., “cherry picking” non-GAAP adjustments to achieve the most positive measure).
• Are based on individually tailored accounting principles, including certain adjusted revenue measures.

Further, when evaluating whether a COVID-19-related adjustment is appropriate in a non-GAAP measure, a registrant should consider several factors including, but not limited to, whether the adjustment is:

• Directly related to COVID-19 or the associated economic downturn.
• Incremental to normal operations and nonrecurring (i.e., it is not expected to become the “new normal”).
• Objectively quantifiable, as opposed to an estimate or projection.

Listed below are potential COVID-19-related adjustments that registrants might consider in their non-GAAP measures. While we have categorized the adjustments into three groups, each registrant must consider its own facts and circumstances in light of the SEC’s rules and guidance. For example, an entity that has seen an increase in revenues because of COVID-19 may want to be cautious about adjusting for COVID-19-related costs. A registrant must also take into account the purpose and use of the resulting non-GAAP measure and the context in which it is presented. In addition to the examples below, see Deloitte’s A Roadmap to Non-GAAP Financial Measures and Metrics for more information about SEC requirements and interpretations.

The categories of adjustments are as follows:

Adjustments that are likely to be consistent with SEC requirements and interpretations include those related to:

 

Connecting the Dots

Certain provisions of the CARES Act may enable a registrant to obtain government grants to help mitigate many of the costs incurred during the pandemic, including those associated with items such as rent, utilities, and salaries. If a registrant obtains a grant (or other similar compensation) and also chooses to include an adjustment or adjustments for COVID-19 in its non-GAAP measure(s), it should consider adjusting its non-GAAP measure(s) for both the costs and corresponding grant income to avoid the appearance of “cherry picking.”

Adjustments that may not be consistent with SEC requirements and interpretations include those related to:

 

Connecting the Dots

As a result of adopting the CECL standard, entities will recognize impairment of financial assets at the end of each reporting period on the basis of an expected losses model rather than the previous incurred loss model. Entities that adopt the CECL standard may want to disclose losses under the incurred loss model. For such entities, disclosing losses under the incurred loss model is allowable during the fiscal period in which the standard is adopted. However, it would not be appropriate to present non-GAAP measures of profitability or liquidity that are based on the non-GAAP incurred loss amounts.

Adjustments that are unlikely to be consistent with SEC requirements and interpretations include those related to:

In a manner consistent with the non-GAAP guidance discussed above and the interpretive release, the SEC would generally expect registrants to disclose the following for all metrics and KPIs used:

• A clear definition of the metric and how it is calculated.
• A statement indicating the reasons why the metric provides useful information to investors.
• A statement indicating how management uses the metric in managing or monitoring the performance of the business.
• A description of any key estimates, assumptions, and limitations (e.g., whether the metric is a “hard” amount or an estimate).
• Presentation of the metric within a balanced discussion.

If metrics change or evolve as a result of the impact of COVID-19 or for any reason, registrants should ensure that there is clear and transparent disclosure of the change and that definitions of the affected metrics are updated accordingly. Further, to provide the appropriate context for changes to metrics, a registrant may need to recast prior periods to conform to the current presentation if the changes are significant.

Further, entities may be required to use assumptions or estimates for more than one purpose (e.g., forecasted revenues or cash flows may be an assumption used in multiple impairment tests, in assessments of the realizability of deferred tax assets, and in an entity’s ability to continue as a going concern). When a single assumption is used in multiple analyses, entities should verify that the same assumption is being used in each analysis unless the guidance in U.S. GAAP permits otherwise. For example, under the current expected credit loss (CECL) model, an entity is required to prepare its own reasonable and supportable forecasts, which is not necessarily consistent with a market-based fair value notion. Such consistency is particularly important for entities with multinational operations or with decentralized accounting and financial reporting functions.

In addition, entities should consider external events and circumstances when assessing whether (1) the changes made in assumptions and estimates from the previous period were appropriate or (2) it was appropriate in the current period not to have updated or changed the assumptions used in the previous period.

 

Disclosure Considerations

[Added September 18, 2020]

When developing estimates, entities need to consider whether they have met all applicable disclosure requirements. ASC 275-10-50-64 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.”

Entities preparing MD&A for inclusion in a filing with the SEC should consider the discussion of “early-warning” disclosures in the SEC Reporting and Disclosure Considerations — MD&A section above.

In addition, it is important to consider the order in which assets are tested so that the entity can ensure that any required adjustments are made before including those assets in the testing of larger units of account. Assets that are not held for sale should be tested for impairment in the following order: (1) assets outside of the scope of ASC 360-10 (other than goodwill) such as inventory, capitalized costs to obtain or fulfill a revenue contract, and indefinite-lived intangible assets, (2) long-lived assets in accordance with ASC 360-10, and (3) goodwill in accordance with ASC 350-20.

As a result of business disruptions associated with the COVID-19 pandemic, an entity may be prevented from entering into customer agreements through its normal business practices, which may make the determination of whether it has enforceable rights and obligations challenging. In addition, because many of its customers are experiencing financial difficulties and liquidity issues, an entity may need to develop additional procedures to properly assess the collectibility of its customer arrangements and consider changes in estimates related to variable consideration (e.g., because of greater returns, reduced usage of its products or services, or decreased royalties). To help its customers or to provide incentives for them to continue purchasing its goods or services, the entity may (1) revise its agreements to reduce any purchase commitments; (2) allow customers to terminate agreements without penalty; or (3) provide price concessions, discounts on the purchase of future goods or services, free goods or services, extended payment terms, or extensions of loyalty programs. Further, because the entity itself may be experiencing financial difficulties and supply disruptions, it may (1) request up-front payments from its customers; (2) delay the delivery of goods or services; (3) pay penalties or refunds for failing to perform, not meeting service-level agreements, or terminating agreements; or (4) incur unexpected costs to fulfill its performance obligations. Therefore, as a result of the changes in circumstances experienced by both an entity and its customers due to the COVID-19 pandemic, an entity may need to consider the following when assessing revenue from contracts with customers:

• Contract enforceability — ASC 606-10-25-1 provides criteria that need to be met to account for a contract with a customer, including the approval of the parties to the contract and a commitment to perform their respective obligations. If the criteria are not met, no revenue can be recognized until one of the following occurs: (1) the criteria are met; (2) no obligations to transfer goods or services remain and substantially all of the consideration promised by the customer has been received and is nonrefundable; (3) the contract has been terminated and the consideration received is nonrefundable; or (4) the entity receives nonrefundable consideration, has provided the goods or services related to such consideration, has stopped providing goods or services, and has no obligation to transfer additional goods or services.
  In certain circumstances, the parties may not be able to approve a contract under an entity’s normal and customary business practices. For example, the entity may not be able to obtain the signatures it normally obtains when entering into a contract because personnel from the entity or customer are unavailable or otherwise unable to provide signatures. Therefore, it is important to carefully evaluate whether the approval process creates a contract with enforceable rights and obligations between the entity and its customer. In making this determination, an entity may consider consulting with its legal counsel. If enforceable rights and obligations do not exist, revenue cannot be recognized until certain conditions are met (see above paragraph).
• Collectibility — A contract with a customer under ASC 606-10-25-1 does not exist unless “[i]t is probable that the entity will collect substantially all of the consideration to which it will be entitled in exchange for the [promised] goods or services that will be transferred.” That consideration should not include expected price concessions (including implied concessions), which are evaluated as variable consideration, even if those concessions are provided as a result of credit risk. In addition, while the collectibility analysis is performed at the individual contract level, an entity may look to a portfolio of similar contracts (e.g., by risk profile, size of customer, industry, geography) in its assessment. For example, if it is probable that an entity will collect substantially all the consideration for 90 percent of a portfolio of similar contracts, the entity may conclude that it has met the collectibility threshold for all the contracts in the portfolio. However, an entity should not ignore evidence related to specific contracts that do not meet the collectibility criterion. In that circumstance, it should evaluate those specific contracts separately. Further, in determining similar contracts under a portfolio approach, an entity could consider disaggregating its contracts at a more granular level than it has in the past. For example, an entity may not have historically disaggregated its contracts by industry but may reconsider its disaggregation on the basis that some industries may be more heavily affected than others (e.g., hospitality, travel).
  An entity should not reassess whether a contract meets the criteria in ASC 606-10-25-1 after contract inception unless there has been a significant change in facts and circumstances. If the impacts of the COVID-19 pandemic result in a significant deterioration of a customer’s or a portfolio of customers’ ability to pay, the entity should reassess collectibility. For example, if a customer experiences liquidity issues or a downgrade in its credit rating, the entity would need to carefully evaluate whether those circumstances are short-term in nature or result in a determination that it is no longer probable that the customer has the ability to pay. Because of the significant uncertainty associated with the effects of the pandemic, it is important for the entity to document the judgments it made and the data or factors it considered. For example, the entity may determine that certain customers that are in financial distress will improve their liquidity position with government assistance. If the entity concludes that collectibility is not probable, a customer contract no longer exists and, thus, the entity can no longer recognize revenue, receivables, or contract assets on a prospective basis. If collectibility becomes probable in a subsequent period and the other criteria in ASC 606-10-25-1 are met, the entity can begin to recognize revenue again. See the discussion on contract enforceability above for conditions that need to be met to recognize revenue when an enforceable contract does not exist.
• Contract modification — An entity may modify its enforceable rights or obligations under a contract with a customer. For example, the entity may grant a price concession to a customer. In that circumstance, the entity should consider whether the concession is due to the resolution of variability that existed at contract inception (i.e., a change in transaction price associated with variable consideration) or a modification that changes the parties’ rights and obligations. A price concession that is provided solely as a result of the COVID-19 pandemic most likely represents a modification that changes the parties’ rights and obligations. However, if a customer has a valid expectation that it will be granted a price concession (e.g., due to past business practices or statements made by an entity), the entity should consider whether expected price concessions give rise to variable consideration that should be estimated and accounted for as a change in transaction price under ASC 606-10-32-42 through 32-45. In addition, if all performance obligations have been satisfied, any price concession would be treated as a change in transaction price.
  An entity may also modify the scope of a contract (e.g., by reducing minimum purchase commitments). If the modification adds only goods or services to the contract for an incremental fee, the entity should first evaluate whether the modification is accounted for as a separate contract under ASC 606-10-25-12. Such a modification is a separate contract if the added goods or services are priced at their stand-alone selling prices (SSPs), which may be adjusted to reflect the circumstances of the contract (e.g., a discount due to the lack of additional selling costs). In making this determination, an entity should consider whether the SSPs of its goods or services have changed in light of the current economic environment. Any changes in the SSPs of goods or services do not affect prior contracts unless those contracts have been modified.
  If the only change to a contract is a reduction of the transaction price, or if the modification is not otherwise a separate contract, the entity should evaluate the guidance in ASC 606-10-25-13 to determine whether the modification should be accounted for as (1) a termination of the old contract and the creation of a new contract because the remaining goods or services are distinct (which results in prospective treatment), (2) a cumulative catch-up adjustment to the original contract because the remaining goods or services are not distinct, or (3) a combination of (1) and (2).
• Variable consideration — Variable consideration includes, among other things, rebates, discounts, refunds (including for product returns), and price concessions. Under ASC 606-10-32-11, an entity should only include amounts of variable consideration in the transaction price if it is not probable that doing so would result in a significant reversal of cumulative revenue recognized when the uncertainty related to the variable consideration is resolved. Further, an entity must update its estimated transaction price in each reporting period. The entity may need to consider any expected changes in (1) its ability to perform and (2) customer behavior as a result of deteriorating economic conditions. For example, an entity may need to consider updating its estimated transaction price if it expects an increase in product returns, decreased usage of its goods or services or decreased royalties, increased invocation of retrospective price protection clauses, changes in redemption rates of coupons or volume rebates, or to potentially pay contractual penalties or liquidated damages associated with its inability to perform (e.g., the inability to deliver goods or services on a timely basis or to meet service-level agreements). In certain circumstances, an entity’s estimate of penalties or liquidated damages could be limited by force majeure clauses. Further, an entity may need to reconsider whether it will be able to achieve milestone payments, performance bonuses, trailing commissions based on renewals, or other performance-related fees.
  If there is a reduction in the estimated transaction price, a change in estimate may result in the reversal of revenue for amounts previously recognized as variable consideration (e.g., as a result of an increase in return reserves). An entity may also need to allocate a reduction in the estimated transaction price to all performance obligations in a contract unless the change in estimated variable consideration is related to only one or more (but not all) performance obligations (or distinct goods or services) in accordance with ASC 606-10-32-40, 32-41, and 32-44 (e.g., penalties for late deliveries may be associated with only some of the goods or services in a contract). In addition, an entity may not need to recognize a reduction in the estimated transaction price when applying the variable consideration constraint if the reduction is too small to result in a significant reversal of cumulative revenue recognized. Because of the significant uncertainty associated with the pandemic’s effects on an entity and its customers, it may be challenging for the entity to make appropriate estimates of variable consideration. Therefore, in a manner similar to its assessment of contract collectibility, an entity must document the judgments it made and the data or factors it considered.
  Further, an entity may have a right to receive noncash consideration (e.g., shares of stock) from a customer that has declined in value. Because noncash consideration is measured at its estimated fair value at contract inception, any changes in the fair value of noncash consideration after contract inception that are solely due to a decrease in value are not variable consideration and would not be reflected in the transaction price under ASC 606-10-32-23. Rather, the noncash consideration should be accounted for under other GAAP.
• Material right — To mitigate any decline in sales, an entity may offer its customers sales incentives, including discounts on future goods or services. In this circumstance, the entity should evaluate whether a sales incentive on the purchase of future goods or services represents (1) a material right under ASC 606-10-55-42 that is associated with a current revenue contract (whether explicit or implicit because there is a reasonable expectation on the part of a customer that he or she will receive a sales incentive at contract inception) or (2) a discount that is recognized in the future upon redemption (i.e., when revenue is recognized for the related goods or services) in a manner consistent with ASC 606-10-32-27.
  In addition, for new or modified contracts, an entity may need to update its estimate of the SSP of a material right (e.g., because the entity extended the periods for use or provided additional incentives to a customer) or to reassess its breakage assumptions (e.g., because of extensions or changes in expected usage patterns). For example, an entity may modify its loyalty program by extending customers’ ability to use points; this change may require the entity to reassess the breakage assumptions it uses.
• Significant financing component — To assist customers that are experiencing liquidity issues in purchasing goods and services, an entity may provide extended payment terms. Similarly, an entity with liquidity issues may require its customers to make an up-front payment in order for the entity to fulfill its promised goods or services. In those circumstances, an entity should evaluate whether a significant financing component exists under ASC 606-10-32-15 through 32-20. If an entity modifies payment terms for an existing customer contract, it should consider the same guidance on price concessions discussed above. In addition, while the extension of payment terms does not in and of itself indicate that a contract is not collectible, an entity may need to consider its procedures for assessing collectibility as noted in the Collectibility discussion above.
• Implied performance obligations — An entity may assist its customers by providing them with free goods or services that are not explicitly promised in the contract. In a manner consistent with ASC 606-10-25-16, an entity should determine whether its contracts with customers contain promised goods or services that are implied by its customary business practices or published policies or by specific statements that create a reasonable expectation of the customer that the entity will transfer those goods or services.
  There may also be instances in which an entity provides free goods or services to its customer that are not part of a prior contract with that customer (i.e., when the prior contract was entered into, there were no explicit or implicit obligations to provide those goods or services). An entity must carefully evaluate whether the additional promised goods or services are a modification of a preexisting customer contract or a cost incurred (e.g., marketing expense) that is separate from any preexisting contracts. We believe that in these situations, it may be helpful to consider the contract combination guidance in ASC 606-10-25-9, which specifies that contracts with the same customer (or related party of the customer) are combined if (1) they “are negotiated as a package with a single commercial objective,” (2) “consideration to be paid in one contract depends on the price or performance of the other contract,” or (3) there are goods or services in one contract that would be a single performance obligation when combined with the goods or services in another contract. In addition, an entity should consider the substance of the arrangement to provide the free goods or services and whether accounting for the arrangement as a separate transaction or as a contract modification would faithfully depict the recognition of revenue related to the goods or services promised to the customer in a preexisting contract. In many cases, free goods or services provided to a customer solely as a result of the COVID-19 pandemic (that are not part of another newly entered contract with that customer) will not be considered a contract modification, particularly if they are broad based and not negotiated with the customer. However, an entity may need to determine whether it has developed a practice that creates an implied promise in future contracts.
• Recognition of revenue — Because of potential supply disruptions or other circumstances, an entity may need to reconsider the timing of revenue recognition if it is unable to satisfy its performance obligations on a timely basis. Revenue cannot be recognized until control of the goods or services transfers to the customer (i.e., when the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from, the goods or services). For example, an entity may not be able to fulfill its stand-ready obligation due to government-mandated shutdowns (e.g., the temporary shutdown of a health club). In that circumstance, the entity may need to cease recognizing revenue until it is able to perform. In addition, the entity must determine whether there are any contractual penalties that would affect the transaction price. In some cases, an entity may be completely unable to satisfy its performance obligation, which could result in (1) the termination of the contract, (2) a reversal of any revenue it previously recognized for a performance obligation that was not fully satisfied, and (3) the recognition of a refund liability (or additional liability due to a payment of penalties) instead of deferred revenue.
  Sometimes, delays in the transfer of goods or services may be caused by the customer or other external factors. For example, a customer may not be able to obtain physical possession of a product because of shipping delays or because it cannot receive the product (e.g., warehouse personnel may be unavailable). In such cases, an entity should carefully consider when control of the product transfers (e.g., before or after shipment). Further, if a customer is unable to take physical possession of the product, it may request that the entity retain the product on a bill-and-hold basis. In this circumstance, the entity would need to consider the bill-and-hold guidance in ASC 606-10-55-81 through 55-84.
  An entity may also incur unexpected costs in fulfilling a performance obligation that is satisfied over time. If that entity uses a cost-based input method to measure its progress toward complete satisfaction of the performance obligation, it should carefully consider whether the incremental costs (1) affect its measure of progress or (2) do not depict the entity’s performance in transferring control of the goods or services (e.g., because the costs are due to unexpected amounts of wasted materials, labor, or other resources). Therefore, an entity may need to reevaluate the expected costs to complete its contracts and consider future material, labor, and the allocation of overhead rates.
• Loss contracts — An entity would not recognize a loss on a revenue contract unless it was within the scope of certain legacy U.S. GAAP, including ASC 985-605 for software arrangements, ASC 605-20 for separately priced extended warranty and product maintenance contracts, and ASC 605-35 for construction-type and production-type contracts. For example, an entity that has construction-type or production-type contracts within the scope of ASC 605-35 may need to consider whether an increase in its estimated costs would result in a contract loss that would need to be recognized immediately.

 

Disclosure Considerations

Many of the circumstances described above could affect an entity’s disclosures. These include (but are not limited to) disclosures of significant changes in the contract asset due to an impairment, significant payment terms (including any significant financing component), and the timing of when an entity expects to recognize revenue for its remaining performance obligations (which would exclude terminated contracts or transactions that do not meet the criteria in ASC 606-10-25-1 to be accounted for as a customer contract). Given the level of uncertainty caused by the COVID-19 pandemic, an entity may find it challenging to make certain critical estimates. Therefore, it is important for the entity to disclose any significant judgments it made in accounting for its revenue contracts (e.g., assessing collectibility; estimating and constraining variable consideration; measuring obligations for returns, refunds, and other similar obligations; measuring progress toward completion of a performance obligation recognized over time; and determining the SSPs and breakage assumptions for material rights).

For health care providers, the CARES Act introduced legislation that could affect the amount of future reimbursements from third-party payors (e.g., Medicare and Medicaid), which could require affected entities to reevaluate their estimates of variable consideration. In addition, health care providers may receive advance payments from Medicare for services yet to be rendered. These advance payments would typically be recorded as a contract liability (e.g., deferred revenue). However, if any material amounts of advance payments are expected to be refunded instead of being applied to future services, such amounts would be recorded as a refund-type liability.

The CARES Act also allows federal agencies to reimburse federal contractors and subcontractors for certain payroll costs associated with paid leave or sick days. This provision could also require affected entities to reevaluate their estimates of variable consideration. For more information, see Deloitte’s Heads Up, "Highlights of the CARES Act."

All loss contingencies (including incurred but not reported [IBNR] claims such as those related to medical care) should be evaluated under ASC 450-20 unless the contingency is within the scope of other authoritative literature that specifically prescribes an alternate accounting model. ASC 450-20 requires accrual of a loss contingency when (1) it is probable that a loss has been incurred and (2) the amount can be reasonably estimated. To accrue a loss contingency, an entity must determine the probability of the uncertain event and demonstrate its ability to reasonably estimate the loss associated with it. Loss contingencies that do not meet both recognition criteria may need to be disclosed in the financial statements. Given the general uncertainty associated with the COVID-19 pandemic, entities may find it challenging to develop estimates for loss contingencies. For example, an entity that is self-insured for medical claims may have difficulty estimating its IBNR liability if it concludes that historical claim patterns may not be representative of future expected claims because of the COVID-19 pandemic.

 

Disclosure Considerations

Under ASC 450-20-50, entities must disclose both recognized and unrecognized contingencies, if certain criteria are met. In some situations, disclosure of the nature of the accrual and amount accrued may be necessary to prevent the financial statements from being misleading. For unrecognized contingencies, disclosure of the nature of the contingency and an estimate of the possible loss or range of loss (or a statement that an estimate cannot be made) is required in certain situations. Specifically, disclosure is called for if there is a reasonable possibility that a loss may be incurred but has not been accrued in the financial statements because the amount is not probable or reasonably estimable. Disclosure is also required if there is a reasonable possibility of unrecorded losses in excess of the amount accrued in the financial statements.

As a result of the COVID-19 pandemic, certain entities are experiencing significantly reduced consumer traffic in retail stores and shopping areas or indefinite closures as a result of quarantine measures and other government directives. Lessees in some affected markets are receiving rent abatements or other economic incentives and have raised questions about the appropriate accounting. In particular, entities have asked whether such consequences give rise to a lease modification — and thus full application of the modification framework in ASC 840 or ASC 842 — or whether they can be accounted for outside of the modification framework (e.g., as the resolution of a contingency or variable rent expense or income).

Generally speaking, under ASC 840 or ASC 842, economic relief that was agreed to or negotiated outside of the original agreement most likely represents a lease modification, in which case both the lessee and lessor would be required to apply the respective modification frameworks. However, if the lessee was entitled to the economic relief because of either contractual or legal rights, the relief would be accounted for outside of the modification framework.

Without relief related to applying the guidance, an entity would most likely need to perform legal analysis to determine whether contractual provisions in an existing lease agreement provide enforceable rights and obligations related to lease concessions. Given the significant number of leases potentially affected for certain preparers and the volume of contracts that need to be analyzed, this evaluation could become both costly and highly complex for preparers, particularly for smaller companies and those without internal legal counsel. This analysis could be even more complex in jurisdictions in which the local government implements programs that permit or require forbearance.

In the absence of interpretive guidance, the FASB staff acknowledged at the April 8, 2020, Board meeting that determining whether concessions provided to lessees constitute a lease modification under either ASC 842 or ASC 840 would be costly for both lessees and lessors. Accordingly, while the guidance in these standards takes into account lease concessions made in the ordinary course of business, the FASB believes that the guidance did not contemplate wide-ranging and rapidly executed concessions that result from a global pandemic. Further, the staff acknowledged that the economics of these concessions may not be aligned with the underlying premise of the modification framework, under which the concession would be recognized over the remainder of the lease term.

The FASB thus determined that it would be appropriate for entities to make a policy election regarding how to account for lease concessions resulting directly from COVID-19. Rather than analyzing each lease contract individually, entities can elect to account for lease concessions “as though the enforceable rights and obligations for those concessions existed, regardless of whether those enforceable rights and obligations for the concessions explicitly exist in the contract.”10 Accordingly, entities that choose to apply the relief provided by the FASB can either (1) apply the modification framework for these concessions in accordance with ASC 840 or ASC 842 as applicable or (2) account for the concessions as if they were made under the enforceable rights included in the original agreement and are thus outside of the modification framework. Therefore, in making this election, an entity would not need to perform a lease-by-lease analysis to evaluate the enforceable rights and may instead simply treat the change as if the enforceable rights were included or excluded in the original agreement. However, the staff observed that the election not to apply modification accounting is only available when total cash flows resulting from the modified contract are “substantially the same or less” than the cash flows in the original contract. The FASB did not define “substantially the same” but expects companies to apply reasonable judgment in such situations. Further, the Board emphasized that clear and concise disclosure of the accounting policy election remains integral to allow stakeholders to understand the election chosen and the resulting financial reporting implications. Finally, we understand, on the basis of discussions with the SEC staff, that the staff would not object if an entity treats “forgiveness or deferrals” either as a contract modification or as if the concession was made under the enforceable rights included in the original agreement. In a manner similar to the FASB, the SEC would limit this option to activity that is both directly related to COVID-19 and does not result in a substantive increase in the remaining contract consideration. The above accounting guidance and optional election are illustrated in the following decision tree.

On April 10, 2020, the FASB issued a staff Q&A12 (the “Staff Q&A”) to provide guidance on its remarks at the April 8, 2020, Board meeting about accounting for rent concessions resulting from the COVID-19 pandemic. Specifically, the Staff Q&A affirms the guidance provided at the April 8 meeting by allowing entities to forgo performing the aforementioned legal analysis to determine whether contractual provisions in an existing lease agreement provide enforceable rights and obligations related to lease concessions as long as the concessions are related to COVID-19 and the changes to the lease do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. In addition, the Staff Q&A affirms that entities may make an election (the "Election") to account for eligible concessions, regardless of their form, either by (1) applying the modification framework for these concessions in accordance with ASC 840 or ASC 842 as applicable or (2) accounting for the concessions as if they were made under the enforceable rights included in the original agreement and are thus outside of the modification framework.

The sections below address frequently asked questions about how an entity should account for COVID-19-related concessions, including certain questions from lessees and lessors regarding the scope and application of the Staff Q&A.

 

Connecting the Dots — The Election Also Applies to ASC 840

Although the sections below focus on the accounting under ASC 842, the Election and interpretations described below can be applied by entities that have not yet adopted ASC 842. However, the ASC 840 accounting framework, including the modification framework, is significantly different, particularly for lessees (operating leases do not have recognized lease liabilities), so outcomes under ASC 840 may differ significantly from those discussed in this publication.

 

Bridging the GAAP — Practical Relief Under IFRS 16

At its April 17, 2020, meeting, the International Accounting Standards Board (IASB®) also discussed providing “practical relief” that would give lessees “an optional exemption from assessing whether a COVID-19-related rent concession is a lease modification.” (The IASB issued an exposure draft related to this topic on April 24, 2020.) A lessee applying this exemption would account for such a rent concession as if it was not a lease modification under IFRS 16.13 That said, there are key differences between the IASB’s tentative decisions about practical relief under IFRS 16 and the FASB’s guidance under ASC 842 (e.g., the proposed relief under IFRS 16 is only for lessees). See the IASB’s Web site and educational materials for further background on its proposed relief and standard-setting process.

The COVID-19 pandemic may give rise to specific transactions or events that could affect a reporting entity’s accounting conclusions and disclosures related to consolidation as well as its equity method accounting. Such transactions or events may include the following and are discussed in greater detail in the succeeding sections:

• Operating losses — During the economic downturn associated with the COVID-19 pandemic, a legal entity may incur substantial operating losses that reduce the level of its equity investment at risk.
• Change in governance rights affecting the party (or parties) with power to direct the activities of a VIE that most significantly affect the VIE’s economic performance — In the event of a legal entity’s default on covenants as a result of operating losses, or if there are otherwise changes in rights or governance provisions of a legal entity related to the COVID-19 pandemic, a lender or other entity may obtain rights to participate in or make decisions of the legal entity.
• Time lag — If a parent reports a subsidiary’s financial results on a time lag, or if an equity method investor reports an equity method investee’s financial results on a time lag, there may be material intervening events arising from the COVID-19 pandemic during the period between the subsidiary’s or investee’s year-end reporting date and the reporting entity’s balance sheet date that the reporting entity may be required to either disclose or both recognize and disclose.
• Equity method basis differences — The recognition of an other-than-temporary impairment charge for an equity method investment related to the COVID-19 pandemic may affect existing equity method basis differences or give rise to new ones. [Paragraph added May 7, 2020]

Note that the initial assessment of whether a reporting entity has a controlling financial interest in a legal entity should be performed on the date on which the reporting entity first becomes involved with the legal entity. A reporting entity is required to reconsider whether a legal entity is a VIE upon the occurrence of certain types of events (“VIE reconsideration events”) but should not reconsider whether a legal entity is a VIE on a continual basis or as a result of circumstances other than the specific events outlined in ASC 810-10-35-4. See Chapter 9 of Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest for further discussion of VIE reconsideration events.

A reporting entity must continually reassess whether it is the primary beneficiary of a VIE throughout the entire period in which the reporting entity is involved with the VIE.19 However, because consolidation of a VIE is based on the power to direct the activities of a VIE that most significantly affect the VIE’s economic performance, it is unlikely that the primary-beneficiary conclusion will change periodically in the absence of specific transactions or events that affect the power over a VIE. See Chapter 7 of Deloitte’s A Roadmap to Consolidation — Identifying a Controlling Financial Interest for further discussion of the identification of the primary beneficiary of a VIE.

While the CARES Act provides a number of programs to alleviate some or all of the costs associated with the unforeseen consequences of the COVID-19 pandemic (see the Government Assistance discussion for further detail), entities may nevertheless be considering (or implementing) plans to mitigate their exposure. For example, entities may take measures to reduce their workforce through temporary employee furloughs in response to the state governments’ mandates to close facilities temporarily. Further, entities may be forced to consider subsequent restructuring actions as information becomes available on the long-term effects of the pandemic on the entities' operations. There are multiple accounting frameworks for the accounting for these employee benefits; therefore, entities start by identifying the nature and characteristics of each proposed action that is being considered because it may affect the timing of the recognition of the benefits provided to employees. Some of those frameworks are described below.

 

Disclosure Considerations

The uncertainties discussed above may or may not be considered contingencies as defined by ASC 450-10-20; accordingly, the disclosures required by ASC 275-10-50 supplement and, in many cases, overlap those required by ASC 450-20-50. For example, some entities may be required to disclose certain significant estimates and their current vulnerability because of concentrations associated with the COVID-19 pandemic.

In response to the COVID-19 pandemic, domestic and international governments are considering, or may have implemented, legislation to help entities that have experienced financial difficulty associated with it. One such example is the CARES Act, which provides assistance in the form of loans, grants, tax credits, or other forms of government aid. Although some forms of assistance may be referred to as “grants” or “credits,” entities should carefully look at the form and substance of the assistance to determine the appropriate accounting framework to apply. For example, assistance may be in the form of income-based tax credits that are dependent on taxable income or other forms of government assistance that is not dependent on taxable income (e.g., payroll tax credits). Income-based tax credits generally will be within the scope of ASC 740 (see the Income Taxes discussion for further details). Government assistance that is not dependent on taxable income is generally not within the scope of ASC 740 and would most likely be viewed and accounted for as a government grant.

Under ASC 220-20-45-1, if an entity concludes that a material event is of an unusual nature or occurs infrequently (or both), the entity must either report the nature and financial effects of the event as a separate component of income from continuing operations or provide disclosure in the notes to the financial statements. Under this guidance, “unusual nature” represents a situation in which the underlying event has a high degree of abnormality and not related to the ordinary activities of the entity. Furthermore, “infrequency of occurrence” represents an event that would not reasonably be expected to recur in the foreseeable future. We believe that most companies will consider COVID-19 to be unusual or infrequent and that a decision about whether to separately disclose related amounts would therefore primarily be based on the materiality of the impact on its financial statements.

ASC 220-20 does not provide guidance on assessing how the financial effects of a qualifying event should be disclosed; accordingly, a registrant may need to use significant judgment when determining the amounts to separately report or disclose. We believe that in determining how to report such amounts, an entity could reasonably conclude that disclosing direct and incremental costs or benefits related to the COVID-19 pandemic would be consistent with the spirit of the guidance above (e.g., asset impairments, cleaning costs, business interruption insurance recoveries). However, as businesses begin to reopen and recover, it may become more difficult for them to objectively determine the unusual costs related to COVID-19. New internal controls may need to be implemented along with such presentation. [Paragraph amended July 1, 2020]

Income statement presentation for public companies is also addressed in SEC Regulation S-X, Rule 5-03,28 for commercial and industrial companies. In certain instances, the SEC has given registrants flexibility in disaggregating the components of required line items on the face of the statement of comprehensive income. Registrants that are significantly affected by the COVID-19 pandemic may consider presenting a separate line item or line items on their statement of comprehensive income to show the impact of this unusual or infrequent event. To the extent that an entity elects to present a separate line item or line items on its statement of comprehensive income, we encourage it to transparently disclose both the nature and amount of all costs included in the line item(s) in the footnotes to the financial statements and in MD&A.

 

Connecting the Dots

COVID-19-related items that are presented separately on the face of the income statement may not fully correlate with acceptable adjustments in a registrant’s non-GAAP measure (i.e., a line item may be appropriate for separate presentation, but some components of the line item may not be allowable adjustments in a non-GAAP measure). See discussion above. [Added July 1, 2020]

Registrants that present a separate line item or line items for the impact of COVID-19 should consider the effect on gross profit or operating income subtotals presented. For example, while a subtotal for gross profit is not required by Rule 5-03, certain costs such as inventory impairment are expected to be part of costs of sales (and therefore included in gross profit) by analogy to ASC 420-10-S99-3. In addition, under Rule 5-03, a subtotal for operating income is not required on the face of the income statement; but if a registrant presents a subtotal for operating income, it should generally present any COVID-19-related line item as part of operating income.29 Further, we believe that a separately presented COVID-related line item should not be preceded by a subtotal such as “income before COVID-related amounts” (even if the subtotal is presented without a caption).

As part of performing this assessment, management may need to consider whether the entity’s financial statements should continue to be prepared on a going-concern basis (i.e., whether ASC 205-30 is applicable). Even more importantly, management must consider whether (on the basis of ASC 205-40), (1) there are conditions and events that, when considered in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date on which the interim or annual financial statements are issued and (2) these conditions are able to be mitigated by management’s plans.

ASC 205-40 requires an entity to provide disclosures in the annual and interim financial statements when events and conditions are identified that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued. Such disclosures are required even when management’s plans alleviate such doubt about the entity’s ability to continue as a going concern. If management’s plans do not alleviate substantial doubt about the entity’s ability to continue as a going concern, in addition to the required disclosures, management must state in the notes to the financial statements that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date on which the annual or interim financial statements are issued.

As indicated in ASC 205-40-55-2, assessing whether there is substantial doubt about an entity’s ability to continue as a going concern may involve the consideration of factors such as the following:

Given the economic environment and the likelihood that events may occur rapidly or unexpectedly, entities should carefully evaluate information that becomes available after the balance sheet date but before the issuance of the financial statements. ASC 855-10-25-1 and ASC 855-10-25-3 provide the following guidance on evaluating subsequent events:

Often the “events” are (1) company specific and (2) associated with a specific account that permits a more precise analysis. However, sometimes the “events” are macroeconomic in nature (such as those resulting from COVID-19) and have a pervasive impact on many estimates in a set of financial statements, which may make it difficult to ascertain whether such conditions “existed” on the balance sheet date. The medium-term and long-term effects of the COVID-19 pandemic on economic activity are still unknown. However, COVID-19 will be a factor in an entity’s analysis of estimates residing in the financial statements, including, but not limited to, estimates related to receivable reserves, obsolescence reserves, impairment analyses, variable and contingent compensation, and CECL reserves. While the events stemming from COVID-19 are extremely volatile, entities will nevertheless be required to consider conditions as they existed on the balance sheet date when evaluating subsequent events. There are currently many approaches to the consideration of subsequent events in complex estimate analyses such as impairment models (e.g., whether changes in circumstances that alter projection models before issuance date can be considered given the fluidity of the situation).

Although the COVID-19 pandemic and the significant judgment that will most likely need to be applied in assessments related to subsequent event matters, entities are encouraged to consult with their advisers as needed.

Entities should also consider the potential for subsequent-event accounting and reporting associated with the CARES Act’s March 27, 2020, enactment. For more information, see Deloitte’s Heads Up, "Highlights of the CARES Act."

 

Disclosure Considerations

[Added September 18, 2020]

ASC 855-10-50-2 notes, in part, that “[s]ome nonrecognized subsequent events may be of such a nature that they must be disclosed to keep the financial statements from being misleading.” In such circumstances, the disclosures must include (1) the “nature of the event” and (2) an “estimate of its financial effect, or a statement that such an estimate cannot be made.”

Adjustments to forecasted income (like those assumed for other impairment analyses) will also need to be factored into an entity’s estimated annual effective tax rate (AETR). In some cases, the reduction in forecasted income might be accompanied by a similar reduction in tax (e.g., if the entity has only insignificant permanent items or permanent items that increase or decrease proportionately to ordinary income), resulting in only small changes to the AETR. If, however, an entity’s permanent items are more significant and do not “scale,” the entity’s AETR might be highly sensitive to changes in estimated ordinary income for the year, rendering any individual AETR estimate unreliable. In those instances, the actual effective tax rate for the year to date may be the best estimate of the AETR.

Similarly, if an entity or its subsidiaries have liquidity issues, or other issues resulting from the current economic environment, an entity may also need to reassess whether undistributed earnings of foreign subsidiaries are still indefinitely reinvested or whether a deferred tax liability should now be recorded for an outside basis taxable temporary difference in a foreign subsidiary. While most entities have already recorded U.S. tax on a significant portion of their undistributed foreign earnings and profits,30 repatriation of such undistributed earnings and profits may still trigger currency gains and losses and be subject to additional withholding or to state or other income taxes.

Entities should account for and disclose changes in tax law (including those related to the CARES Act) in the period that includes the enactment date of such changes. Entities should also be aware that not all forms of tax relief and tax credits will fall within the scope of ASC 740; those that can only be monetized against non-income-based taxes (e.g., payroll taxes) would be accounted for in accordance with other literature. For a complete discussion of the tax effects of the CARES Act, see Deloitte's Heads Up, "Highlights of the CARES Act." [Paragraph amended April 13, 2020]

 

Disclosure Considerations

[Added September 18, 2020]

If a valuation allowance is needed because COVID-19 has affected the realizability of deferred tax assets, entities are encouraged to disclose the types of positive and negative evidence they identified and considered and how they assessed and weighed such evidence in reaching their conclusion. In addition, entities should consider disclosing any changes as a result of (1) determining that their actual effective tax rate for the year to date is their best estimate of the annual effective tax rate and (2) using such amount or modifying any assertions with respect to undistributed foreign earnings and profits.

The appendix discusses key accounting and financial reporting considerations related to the impact of the COVID-19 pandemic on the following industries:

• Banking and Finance
• Media and Entertainment
• Real Estate
• Oil and Gas
• Power, Utilities, and Renewables
• Aerospace and Defense
• Life Sciences
• Consumer

  • Transportation
    • Airlines
    • Shipping and Logistics
    • Passenger Ground Transportation
  • Hospitality and Services

    • Hotels, Resorts, and Casinos
    • Restaurants and Food Services
    • Cruise Lines
  • Retail
  • Automotive

While not all-inclusive, the discussion below summarizes some of the more significant financial and reporting considerations for entities within the industry.

While not all-inclusive, the discussion below highlights some of the more significant financial and reporting considerations for entities in the real estate industry.

As entities in the upstream sector curtail the number of drilling rigs that they are actively running in their programs, they may seek cost reductions from service providers, including those in the midstream and oil field services sector. This will result in a slowdown in services provided by midstream entities as a result of fewer actively working rigs in 2020 and, therefore, fewer wells to be completed and brought online.

Accordingly, upstream entities will need to consider their particular facts and circumstances, including any potential early-warning signs of negative revisions of proved reserves as well as the related impairment implications, when performing their impairment assessments.

Two impacts of the pandemic that could affect financial reporting for entities in the PU&R industry are discussed below. For more information, see Deloitte's COVID-19 Accounting and Reporting Considerations for Power, Utilities, and Renewables.

Other key considerations for aerospace and defense entities are discussed below.

While not all-inclusive, the discussion below summarizes some of the unique considerations for entities in the industry.

Entities in the sector have also experienced disruptions in the supply chain, including those related to (1) competition for suppliers when acquiring raw materials, (2) decreased manufacturing capacity in certain locations, and (3) transportation patterns for merchandise. Many retailers are assessing the impact of production delays on inventory assortments and are considering options to mitigate the impact of such delays, including (1) a reassessment of the normal inventory logistics patterns and (2) increased use of air freight if available.

As a result of concerns about the workforce (corporate and store employees alike), employees may work remotely or be furloughed. Further, certain retailers that had been facing operational challenges before the pandemic, or that have high leverage ratios, could experience liquidity challenges if they are unable to adequately manage inventory, payroll, and rent during any prolonged period of revenue decline.

Noteworthy accounting considerations include:

• Costs related to potential staffing reductions due to store closures or significant declines in traffic.
• The impact of tenant occupancy clauses, which may provide rent relief if the mall or center becomes vacant.
• Negotiated rent relief provided by landlords, if available.
• Impairment of long-lived assets (e.g., store assets, ROU assets, goodwill and other intangibles) due to reductions in revenue and gross margin and possible declines in the stock prices of major retailers. Although depreciation generally does not cease when an asset is temporarily idled, if a retailer determines that operations will be restructured in response to the impact of the pandemic, impairment and useful lives of long-lived assets will need to be considered.
• Inventory obsolescence if a retailer will not be able to sell through merchandise.
• Penalties for any order cancellations, to the extent applicable.
• Changes in the volume or patterns of discounts and allowances provided to customers, which may affect revenue recognition.
• The potential to receive discounts or allowances from vendors if purchasing and sales volumes drop, which may affect the cost of revenue.
• Liquidity and financing considerations related to servicing debt obligations and covenant compliance, including the assessment of going concern, if revenue declines are significant.
• The consistent application of an SEC registrant’s definition of same-store sales and other metrics, or transparent disclosure of any changes to such metrics.

Noteworthy accounting considerations that may arise for the automotive sector include:

• Impairment of nonfinancial assets (e.g., long-lived assets, amortized intangibles) — Significant disruptions to supply or production, declines in consumer demand, or other relevant impacts may (1) represent events or changes in circumstances that indicate that the carrying amounts of certain nonfinancial assets might not be recoverable (requiring impairment tests for the affected nonfinancial assets) or (2) result in the abandonment or permanent idling of long-lived assets (resulting in accelerated depreciation or impairment charges).
• Impairment of goodwill and indefinite-lived intangible assets — Events and circumstances resulting from COVID-19 that indicate that it is more likely than not that the fair values of reporting units with goodwill and indefinite-lived intangible assets are less than the reporting units’ carrying amounts would require interim impairment tests of goodwill and indefinite-lived intangibles between annual impairment testing dates.
• Inventory valuation — Periods of abnormally low production (for OEMs and suppliers) may limit the capitalization of certain costs (e.g., fixed overhead costs) in inventory. In addition, changes in consumer preferences or demand may affect the valuation of inventory held by automotive retailers (as well as OEMs and suppliers) or may result in excessive inventory levels.
• Revenue recognition — Changes in consumer preferences and demand may require OEMs to offer new incentive programs or maintain existing incentive programs for longer than expected. Doing so could have revenue recognition (variable consideration) implications for OEMs or make dealers more dependent on OEMs to move their inventories.
• Restructuring activities — In response to the impacts of COVID-19, automotive companies may implement restructuring actions (e.g., layoffs, contract terminations), the accounting for which can vary depending on the nature of the restructuring activity (e.g., voluntary vs. involuntary terminations, one-time termination benefits vs. benefits provided in accordance with a preexisting plan).
• Credit losses — The financial health of automotive companies’ customers and, therefore, the collectibility of financial assets held by automotive companies, such as accounts receivable (including dealers’ receivables from OEMs under incentive and other programs) and loans receivable (particularly for OEMs with captive financing subsidiaries) may be adversely affected. Any credit losses will need to be evaluated under ASC 310 or ASC 326, as applicable.