Certified Public Accountants (CPA) should understand that financial reports they prepare in 2020 will look differently than reports they prepared in all years prior to 2019. The difference, of course, is that 2020 saw a global pandemic that had a devastating impact on small businesses across the country. Even companies that did not shut down will see dramatic differences in their financial reports this year. The important thing for you as a CPA is to educate yourself now so you can provide clients with accurate financial reports for 2020 regardless of the report creation date.
Start by Identifying Areas of Impact
Before you sit down to prepare a financial report for clients, it’s important to review the company as a whole and figure out where coronavirus disruption impacted it the most. Here are just five possibilities:
- Effect of coronavirus on owner and employee retirement plans
- Hedging Strategies
- Increased liquidity and cash flow risks
- Supply chain problems such as difficulty in procurement and valuation of inventory
- Tax strategies, especially as they pertain to deferred tax assets and the valuation of them
We also recommend that you regularly monitor the business credit reports of active clients. If you start seeing worsening credit across the board, it could indicate that your CPA firm may soon have bad debt. This situation requires a proactive approach such as re-tooling your firm’s bad debt allowance before any accounts become uncollectable.
Best Practices to Meet Accounting Disclosure Requirements
When an event occurs that has a dramatic impact on business financial reports, the General Accepted Accounting Procedures (GAAP) of the United States requires the following differentiation between types of events:
- A recognized subsequent event is one that lists additional evidence about a known situation such as pending litigation or bankruptcy. You must have known about the event on the day you created the financial report to include it.
- A non-recognized subsequent event identifies events like a natural disaster or the coronavirus pandemic that didn’t yet exist when you created your client’s balance sheet. The event arose after the date indicated on the balance sheet but before making it available for public viewing. You must disclose the event and make a brief statement about its financial impact in the footnotes of the report in this situation. If you can’t yet determine the financial effect of coronavirus on your client’s company, you should state that as well. This ensures that you legally abide by disclosure statement laws.
Creating financial reports can become even more complicated when your client suffered financial loss in both 2019 and 2020 due to coronavirus. The disease existed prior to the World Health Organization (WHO) declaring it a pandemic on January 30 because the risk was already present in China by December 31, 2019. As a CPA, this could require you to make calendar year entries for both 2019 and 2020 if coronavirus had a direct impact on your client’s financials.
We Have Only Scratched the Surface
Many additional concerns go into creating accurate financial reports in the face of a new and rapidly changing worldwide pandemic. The need to change your audit process and spend more time and resources on client estimates are just two examples. Palmetto Payroll is here to help. Please contact us to learn more about how we can support your accounting firm during this challenging time.