6 financial reporting and assurance considerations under COVID-19
Depending on the year-end of the organization, the financial reporting impact and the reporting considerations will be significantly different, says Bridget Noonan of Clearline Consulting
VANCOUVER – I am sure the last two weeks have been the same for many small accounting firms across Canada, finding themselves somewhere on the scale between a temporary halt of operations and ordered chaos, during the coronavirus outbreak. Many of us have been distracted with the implementation of remote working for staff including check-in points, monitoring daily federal and provincial subsidies announcements, responding to clients for assistance in subsidiary calculations, ROE’s and consultations on business continuity and setting up alternative means to receive and distribute client information.
As we have started to find some normality in our new daily work routines, we have turned our attention back to wrapping up and finalizing all those engagements that were under way mid-March. Given the magnitude of the impact and disruption of COVID-19, it is virtually inconceivable that any entity would find themselves not affected by COVID-19 in some manner. Depending on the year-end and status of the engagement as at mid-March, the potential impact on the engagement will differ.
For December 31, 2019 assurance engagements COVID-19 will be limited to subsequent events considerations. Even those organizations with international customers or suppliers are likely to be limited to subsequent events disclosures given the timeline of the initial reports to the World Health Organization in late December. The difficult part in these engagements will be to clearly distinguish between disclosure and recognition. It can be hard to remember that known impairments to assets such as accounts receivable are not adjusted if the conditions were not present at year-end.
However, it all gets a lot more complicated when you start considering the next round of March 31, 2020 year-ends. Ignoring for the time being our client’s ability to pay and the potential code of conduct issues these issues may create over time, here is a short list of considerations to take into account when looking forward to planning these engagements.
#1. Known and potential scope limitations
There are a magnitude of potential scope limitations that should be considered. Consider the possible restriction to client premises (i.e., inventory counts) or the inability to obtain supporting documentation or have adequate access to key staff and management. We may be able to overcome many through the performance of alternative procedures, however, this should be addressed at planning.
Remember that there is an acceptance requirement that requires known scope limitations to be considered prior to accepting an engagement, especially where management has created the scope limitation, which is not expected to be the case for COVID-19 related matters. Before the engagement gets underway, consider the known and pending scope limitations that may be imposed on the engagement.
#2. Financial reporting implications
For entities with March 31, 2020 and subsequent year ends, COVID is not likely to constitute a subsequent event as it occurred prior to year-end. As a result, the impact on the recognition and measurement on assets and liabilities as at the year-end date will need to be considered. As further information becomes available after year-end this assessment will become difficult, but before the financial statements are finalized, judgment will need to be made as to whether that information falls into recognition (further evidence of conditions that existed at year-end) or disclosure requirements (new information for conditions not present at year-end) such as resultant claims and lawsuits.
#3. Disclosure requirements
Disclosure of going concern considerations and subsequent events will be top of mind for many. However there are a considerable number of other disclosures that will need to be assessed. Remember not to overlook the disclosures related to risks and uncertainties, such as the use of estimates and any significant changes, credit risk, liquidity risk, and market risk.
There are likely to be other concentrations of risk depending on the sector in relation to provincial essential service definitions and the continuity of operations as well as related economic dependence issues for suppliers or customers. This list is far from complete; there is considerable guidance related to the financial reporting consideration published by CPA Canada, the provincial CPA bodies and the national CPA firms.
#4. Finalization considerations
Finalization of engagements may also be affected. You may find yourself in a situation where key management are not available to provide management representations at the end of the engagement. In other situations you may find that those charged with governance are unable to approve and accept the financial statements (e.g., NPO board). Remember these are both requirements of client acceptance and you will not be in a position to finalize without obtaining final approval of the financial statements and managements representations.
#5. Reporting considerations
For many, the issuance of anything other than a ‘standard’ review engagement or auditor’s report is not commonly encountered. Given the complexity of reporting this can be difficult to navigate. However, you will need to consider the modification of your conclusions or opinions where you face any of the scope limitations noted previously.
Additionally, given the significance and impact of many presumed disclosures, an emphasis of matter paragraph should be considered for many engagements. Keep in mind that there are certain entities whose operations may not be significantly impacted and, as such, an emphasis of matter paragraph may not be required. The widespread use of emphasis of matter paragraphs diminishes the effectiveness of communication of such matters for those entities who may be facing critical times.
#6. Documentation, documentation, documentation
I would be remiss if documentation did not find its way into this article. For each of the noted considerations, sufficient documentation will need to be provided to support each of the conclusions reached.
CPA Canada and each of the provincial CPA organizations have dedicated web pages which collate guidance that is freely available, and we recommend you take the time to review these.
However, as specific guidance relevant to smaller entities can be difficult to find, we have made available our own comprehensive guides which are a collation of sample note disclosures and report modifications that we are currently working through with our own clients.
Bridget Noonan, CPA, CA, is a partner at Clearline CPA and Clearline Consulting, which provides practitioners and their staff with the tools, training and advice they need to succeed and build thriving accounting firms. To receive our public practice newsletter, visit our website or provide your contact information here.