We’re in a period of time when we’re faced with a global health crisis coupled with significant economic uncertainty and social unrest. Businesses and their leaders realize their obligation to step up and lead to create greater stability to deliver on the larger purpose of the business community. While economic metrics have risen from their pandemic-fueled lows, many challenges remain for companies of all sizes. As we approach quarter close, these events continue to have widespread financial and operational impacts on many companies, requiring our vigilance and attention as accounting professionals.
As global restrictions begin to ease, business leaders are looking ahead to restarting operations - and in many cases restructuring and reimagining those operations - to emerge stronger after the pandemic. Many are considering fundamental changes to the ways business is conducted, including developing cost containment strategies, diversifying supply chains, and making other operational modifications. For example, according to PwC's COVID-19 CFO pulse survey
, 54% of CFOs surveyed anticipate making remote work a permanent option for certain roles.
In this edition of The quarter close, we focus on COVID-19-related accounting and reporting considerations, including recognition models for employee termination costs, reminders for liquidity and financing arrangements, and insights into the FASB staff Q&As on lease concessions and hedging. We also cover recent SEC guidance relating to COVID-19 and disclosure considerations for second quarter filings.
Headlines - Second quarter 2020
COVID-19 accounting and reporting developments
COVID-19 continues to have pervasive financial, operational, and organizational impacts on companies worldwide. At the same time, the global financial markets are experiencing unprecedented volatility and the price of oil and other commodities has fluctuated significantly. Given the continued impacts of the pandemic, the second quarter continues to be challenging from an accounting and reporting perspective for many companies. Our FAQ on COVID-19
answers specific questions about a range of topics, including the different models and triggering events for impairment assessments of tangible, intangible, and financial assets; the accounting for the impact on taxes, revenue recognition, inventory, and debt; and considerations related to internal control over financial reporting.
Additionally, PwC's accounting podcast series includes a library of COVID-19-related podcasts covering the most significant recurring accounting and reporting trends relevant for the second quarter close. Recent podcasts include accounting for contract modifications, navigating challenging valuations and fair value considerations in the current environment, and applying new accounting standards (e.g., leasing, CECL) in the COVID-19 environment.
In response to the market volatility and instability resulting from the coronavirus pandemic, the Coronavirus Aid, Relief & Economic Security (CARES) Act and follow-up legislation, the Enhancement Act, were recently enacted to provide economic support to affected businesses and individuals. Provisions included in the legislation include optional relief from certain accounting guidance, changes to the tax code, availability of below-market loans, various programs that provide government assistance to businesses and individuals, and other elements of fiscal stimulus. For information and resources on the accounting, tax, and reporting implications of the CARES act, see our In depth
, CARES Act - accounting for the stimulus
, listen to our COVID-19: The CARES Act accounting questions, answered
and Beyond the CARES Act: The next phase of business relief programs
podcasts, and check out our What the CARES Act means for US businesses
SEC adopts amendments to improve financial disclosures about acquisitions and dispositions
On May 21, the SEC issued amendments
to its rules around disclosures of acquired or disposed businesses to improve the financial information provided to investors, facilitate more timely access to capital, and reduce the complexity and costs to prepare disclosure. Some of the most significant amendments include:
- The financial statements of acquired businesses only need to be provided for up to the two most recent fiscal years (previously three years were required in some cases);
- A revenue component was added to the income test and the investment test was revised to use the registrant’s aggregate worldwide market value, if available, for determining the period of acquiree financial statements that must be provided; and
- The pro forma financial information requirements were amended to allow, in some cases, optional “Management’s Adjustments” to depict synergies and dis-synergies of the acquisition or disposition.
Inside scoop - Insights from the frontlines
Stay ahead of developing technical accounting trends, including consultation “hot topics,” with the Inside scoop. Here are some of the significant technical accounting trends we’re seeing during the second quarter of 2020:
Employee termination costs - which accounting model applies?
The unprecedented economic environment resulting from COVID-19 has many companies re-evaluating their business models and cost structures. Some companies are moving beyond temporary employee furloughs and are considering permanent layoffs and other restructuring activities. Although workforce restructuring initiatives may appear similar on the surface, there are multiple accounting models that could apply to actions companies take as part of their restructuring efforts.
The following table includes a brief summary of the applicable accounting and timing of recognition for the most common types of employee termination benefits:
Type of termination benefits
Description of the benefits in scope
Timing of liability / expense recognition
Benefits offered by the employer for a short period of time in exchange for an employee’s voluntary termination
When an employee irrevocably accepts the offer and the amount can be reasonably estimated
Involuntary: pre-existing plan, upon occurrence of a specified event
Benefits required by the terms of an existing plan or agreement only upon the occurrence of a specified event (e.g., a plant closing) that causes employees’ services to be terminated involuntarily
When it is probable that the specified event will occur and the employees will be entitled to benefits, and the amount can be reasonably estimated
Involuntary: pre-existing plan or mutually understood benefit arrangement
Benefits provided in accordance with a mutually understood benefit arrangement (or through an enhancement to an ongoing benefit arrangement) between the employer and the employee or former employee
A mutually understood benefit arrangement could be achieved through either a written plan or through a consistent past practice that would constitute a "substantive plan"
When the existing situation or set of circumstances indicates that an obligation has been incurred, it is probable the benefits will be paid, and the amount can be reasonably estimated
One-time involuntary termination benefits that are either not provided under the terms of an ongoing benefit arrangement or one-time enhancements to an ongoing benefit arrangement that would not be applicable for future events
When the conditions specified in ASC 420
have been met, including management’s commitment to a plan and communication to employees
Expense is recognized immediately if future services are not required, or ratably over the period of required future service
Structured payables programs - trade payable or short-term debt?
In an effort to more efficiently manage working capital and increase liquidity, companies are increasingly turning to structured payables programs. These programs, also commonly referred to as “supply-chain financing” or “reverse factoring” arrangements, typically involve three parties: (1) a customer with a trade payable to a supplier, (2) a bank or other financial institution acting as the customer’s paying agent, and (3) a supplier.
Under a typical structured payable program, the customer transfers to the financial institution the trade payable it owes to the supplier, which enables the supplier to be paid by the financial institution, at a discount, before the trade payable is due. These arrangements may be beneficial to all parties, providing increased liquidity and enhanced working capital to the customer and the supplier, with the bank earning income from the amounts charged to the supplier and/or customer.
There are a number of accounting and reporting considerations that customers should consider when transacting through structured payables programs, most significantly whether the accounts payable in these programs remain trade payables or should be reclassified as short-term debt. Additionally, companies need to consider the extent to which financial statement disclosures should be provided to enable financial users to evaluate the existence and financial impact of these programs on companies’ financial condition and performance.
Customer goodwill offerings - more than just a nice gesture?
In the current environment, many companies are providing “customer goodwill” gestures in a variety of forms, including price concessions, free or discounted goods or services, or extended payment terms. While a change to the terms of a customer contract is typically the result of a bilateral negotiation between the parties, these goodwill gestures are often unilateral decisions of the vendor, which can make it more challenging to assess the appropriate accounting model.
To determine the accounting treatment, it is necessary to understand the reasons for the goodwill gesture and whether the price or scope of an existing customer revenue contract has been modified. For example, a price concession could represent a change in estimated transaction price (i.e., variable consideration) or could be a modification that changes the price of the contract and thus, should be accounted for by applying the modification framework in the revenue standard.
Similarly, free or discounted goods or services provided to customers could represent a material right (if offered in connection with another revenue transaction), a modification of an existing contract, or simply a marketing offer that generally has no immediate impact to revenue.
COVID-19 disclosure and non-GAAP measures: reminders and considerations
In a special meeting of the Investor Advisory Committee held on May 4, SEC Chairman Jay Clayton highlighted
the importance of keeping investors and markets apprised about the evolving impact of, and responses to, COVID-19. Chair Clayton and the Committee emphasized that disclosures should be timely, consistent with the related discussions involving senior management, board members, and other stakeholders, and should be forward looking to highlight any known trends or uncertainties. The Committee further discussed the importance of Environmental, Social and Corporate Governance (ESG) disclosures given their importance in helping stakeholders understand how companies have responded to, and will recover from, the pandemic.
The SEC also recently issued guidance
providing the Division of Corporation Finance’s views regarding the disclosure of the business and market impacts of COVID-19.
When preparing filings for the second quarter of 2020, companies should consider COVID-19 disclosures as follows:
- Financial statement footnotes – In addition to disclosures highlighting the specific accounting events driven by the impact of COVID-19 (e.g., impairment triggering events and charges), financial statement disclosures should also include those required under ASC 275, Risks and Uncertainties. Specifically, ASC 275 requires disclosure of company-specific material risks and uncertainties relating to the potential impact on accounting estimates - particularly those estimates that require forecasts - and updates to those significant estimates, forecasts, and uncertainties each reporting period.
- Management’s Discussion and Analysis (MD&A) – MD&A can be a useful tool for companies to provide context on the impact of COVID-19 from both a historical earnings and future expectations perspective. Within their MD&A, companies should consider including a description of the entity-specific current and potential future impacts of COVID-19, including impacts to their financial position, results of operations, and capital resources and liquidity. Additionally, disclosures may be necessary relating to known trends or uncertainties (e.g., changes related to “at risk” reporting units for goodwill impairment).
- Risk factors – Risk factors should be added or updated to provide company-specific disclosures regarding risks that COVID-19 might present from both an operational and financial perspective. Any new or updated risk factors related to COVID-19 should not describe risks as purely hypothetical if they have actually occurred.
Finally, disclosures throughout filings should be monitored for any other necessary updates due to the passage of time, the availability of additional information, and consistency with other disclosures and documents.
Non-GAAP measures and key performance metrics, when used in an appropriate manner and combined with forward-looking discussion within MD&A, may be tools for companies to describe the impact of COVID-19 on their financial results. The identification of adjustments that are attributable to COVID-19 will require judgment and should be based on company-specific facts and circumstances.
When preparing and presenting non-GAAP measures relating to COVID-19, companies should follow existing SEC guidance and regulations. Companies should also ensure appropriate controls and procedures are established, including practices and policies relating to preventing errors or manipulation.
Inside scoop - Practical reminders for new standards
These are our practical insights and reminders to help you prepare for, or finalize, your implementation and ease the challenges of transition to new accounting standards and guidance:
FASB Q&A - accounting for lease concessions
Given the impact of COVID-19, many lessees are seeking - and being granted - concessions from lessors. These concessions come in various forms, including the deferral of lease payments, partial or full rent forgiveness for certain periods, cash payments to lessees, or extension of lease terms. In many cases, it can be operationally challenging and time consuming to determine whether the lease modification guidance should be applied, and in actually applying the guidance when appropriate. This is especially true for companies with large lease portfolios with various terms and conditions (e.g., retailers).
Considering the unprecedented challenges in accounting for rapidly executed lease concessions, the FASB staff provided interpretive guidance in a Q&A on accounting for lease concessions relating to the effects of COVID-19
. Most significantly, this guidance allows lessees and lessors to make an accounting election for COVID-19-related rent concessions to either (1) account for the concession as a modification to the lease agreement or (2) account for the concession as if it is an existing contractual right within the lease agreement. Given the requirements of lease modification accounting, the new guidance is expected to save significant time and resources.
When a concession provides a deferral in the timing of payments, but no substantive changes to total consideration, and the lessee or lessor elects to account for the concession as an existing contractual right, the staff provided two high-level accounting approaches:
- Account for the deferral in timing of lease payments as if there are no changes to the lease contract, including continued recognition of income or expense during the deferral period; or
- Account for the deferred payments as variable lease payments.
The staff also indicated that companies should provide appropriate disclosures about material lease concessions within their financial statements.
For more on the FASB staff Q&A, including illustrative examples of the application of this relief for both lessees and lessors, see our FAQ on COVID-19
. Also, see Chapter 5 of our Leases
guide for more on accounting for lease modifications.
FASB Q&A - effects of COVID-19 on cash flow hedge accounting
The FASB staff issued a Q&A on cash flow hedge accounting impacted by COVID-19
in response to questions regarding how the postponement or cancellation of forecasted transactions resulting from the effects of COVID-19 should be considered when applying cash flow hedge accounting.
In their Q&A, the FASB staff indicated that entities may apply the “rare cases” exception outlined in the hedging guidance for delays in forecasted transactions that are related to the effects of COVID-19, as long as the forecasted transaction is still probable of occurrence within a reasonable period of time.
Separately, the FASB staff clarified that entities do not need to consider missed forecasted transactions relating to the effects of COVID-19 when assessing whether there is a pattern of missed forecasts. For more on hedge accounting implications from COVID-19, see our FAQ on COVID-19
Ask the National Office - Perspectives from our professionals
With many companies facing liquidity questions from the impact of COVID-19, we discuss judgments and considerations when determining the balance sheet classification of debt with Suzanne Stephani, a Director in the Financial Instruments group in PwC’s National Office.
Ask the National Office: balance sheet classification of debt
Director, National Professional Services Group, PwC US
Question: How does receiving a waiver after the balance sheet date, for a debt covenant violation that is present as of the balance sheet date, impact debt classification?
Suzanne: In this scenario, the debt is not automatically classified as noncurrent, even if the lender waives its right to force repayment based on the violation. In many cases, the lender retains future covenant requirements. If this is the case, the company must assess the probability of failing the same or more restrictive covenants within the next year. If it is probable the company will fail those covenants, the debt should be classified as current.
Question: Can a company avoid making this probability assessment of future covenant violations if it anticipates a balance sheet date covenant violation but proactively modifies the debt covenant before the balance sheet date to avoid a violation of the covenant before it occurs?
Suzanne: No, a probability assessment of covenant violations during the one-year period after the balance sheet date - based on the modified covenant - still must be performed when determining classification. This is because the modification is viewed as an in-substance waiver, except that it was obtained prior to the actual covenant violation.
Question: Does a covenant violation that has occurred, or is expected to occur after the balance sheet date impact debt classification as of the balance sheet date?
Suzanne: Since the violation occurred, or is expected to occur, after the balance sheet date there is generally no impact to debt classification as of the balance sheet date. This is because the debt classification assessment is performed based on the facts and circumstances that existed as of the balance sheet date. However, disclosure of the violation or potential violation as a subsequent event would be required.
Question: How do subjective acceleration clauses (SACs) in a debt agreement impact debt classification?
Suzanne: There is a renewed focus on these common clauses in light of the current economic environment. Although SACs come in a variety of forms, one of the most common examples is a material adverse change clause (MAC). The occurrence of a MAC can be an event of default. Because what constitutes a MAC is typically not defined in the debt agreement, the lender’s determination of whether a MAC has occurred is subjective.
When debt includes a SAC, judgment is required to determine the probability of a lender asserting that an event of default has occurred under a SAC/MAC. If default is probable, based on factors existing as of the balance sheet date, the debt should be classified as current.
Question: How is the SAC assessment impacted if there is substantial doubt about a company’s ability to continue as a going concern?Suzanne:
The debt classification guidance gives liquidity issues and recurring losses as examples of situations when debt with a SAC should be classified as current. As a result, if the liquidity issues that gave rise to the substantial doubt existed as of the balance sheet date, the debt should generally be classified as current.For more on debt presentation and classification, see Chapter 12 of our Financial statement presentation
guide, our FAQ on COVID-19
, and our podcast Accounting for debt in uncertain times: 5 things to know
On the horizon - Standard setting developments
Here are some significant standard-setting developments that you need to know as we head into the second half of 2020:
SEC amends accelerated filer definition
On March 12, the SEC adopted financial amendments
expanding the population of companies that are designated as non-accelerated filers. Under the updated requirements, many companies with less than $100 million in annual revenues and a public float between $75 million and $700 million will be non-accelerated filers. Prior to the amended definition, any company with $75 million or more in public float did not qualify as a non-accelerated filer, regardless of revenue.
Most significantly, non-accelerated filers are exempt from the requirement to obtain an auditor’s attestation of their internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (SOX). Additionally, non-accelerated filers are provided additional time to file annual and quarterly reports with the SEC. However, SEC filers must still comply with other requirements of SOX, including providing CEO and CFO certifications and maintaining effective internal control over financial reporting.
SEC registrants are required to apply the amended filer definitions when determining their filer status as of the end of their second fiscal quarter, which for calendar year-end companies will be the fiscal quarter ended June 30.
Deferral of ASC 606 and ASC 842 for certain private companies and not-for-profits
Earlier this month, the FASB issued an accounting standards update
providing an optional one-year deferral of the effective date of ASC 606
, Revenue from Contracts with Customers,
and ASC 842
for the following:
- Revenue: Companies that have not yet issued their financial statements reflecting the adoption of the standard (excluding those companies that would have been required to adopt the revenue standard for annual reporting periods beginning after December 15, 2017); and
- Leases: Private companies and all not-for-profit entities that have not yet issued their financial statements reflecting the adoption of the standard.
Refer to the Appendix for the effective dates of these and other standards. Early adoption of these standards is still permitted.
FASB expected to issue improvements to model for distinguishing liabilities from equity
The FASB proposed
amendments to the guidance for classifying certain financial instruments with characteristics of liabilities and equity, including convertible debt. This project has been on the FASB’s agenda for more than two years and is intended to address the complexity in this often misunderstood area of financial reporting. The proposed guidance would (1) reduce the number of accounting models for convertible debt instruments and convertible preferred stock, (2) revise the derivative scope exception guidance, and (3) amend related disclosure and earnings-per-share guidance.
The Board discussed the final stages of the project at its meeting on June 10 and a final standard is expected to be issued early in the second half of 2020. Once issued, the standard will be effective January 1, 2022 for calendar year-end public business entities that are SEC filers, excluding smaller reporting companies, and January 1, 2024 for all other calendar year-end entities. Early adoption will be permitted.
Stay tuned to our Financial instruments
microsite for the latest developments, including the issuance of the final standard.
PwC Reference library
Introducing PwC’s “What’s next?” podcast series
Each week on our What’s next?
podcast, we’ll be joined by PwC specialists providing insights into various topics related to reopening businesses, emerging from crisis, and what that means for business recovery.
From crisis management and managing change, to human capital considerations, to strategy and digital transformation, we’ll be answering questions about What’s next?.
PwC’s accounting podcasts
PwC's Accounting podcast series includes a library of COVID-19-related podcasts that have been released over the past months covering the most significant recurring accounting and reporting trends relevant for the second quarter close. Some of the more popular COVID-19 podcasts are:
For all of our podcasts on today’s most compelling account and financial reporting issues, subscribe to our podcast feed on your podcast platform of choice.
In the loop
Point of view
Observations from the frontlines
Appendix - Effective dates
Consolidation: VIE related party
Credit losses (a)
Defined benefit plan disclosure requirements Definition of collections
Episodic television series
Fair value measurement disclosure requirements
Goodwill impairment (a)Reference rate reform
Share-based consideration to a customer
Definition of collections
Down round features
Fair value measurement disclosure requirements
Nonemployee share-based payments
Not-for-profit entities: accounting for contributions
Premium amortization on callable debt securities
Reference rate reform
Revenue from contracts with customers (c)
Share-based consideration to a customer
Equity securities, equity method, and derivatives
Simplifying accounting for income taxes
Consolidation: VIE related party guidance
Defined benefit plan disclosure requirements
Episodic television series
Insurance: long-duration contracts (b, e)
Equity securities, equity method, and derivatives
Simplifying accounting for income taxes
Credit losses (a)
Goodwill impairment (a)
Insurance: long-duration contracts (b, e)
a) Effective in 2020 for SEC filers other than SRCs; effective in 2023 for all other companies, including SRCs.
b) Effective in 2022 for SEC filers other than SRCs; effective in 2024 for all other companies, including SRCs.
c) Effective in 2020 for nonpublic entities that have not yet issued financial statements or made financial statements available for issuance reflecting the adoption of ASC 606
d) Effective in 2022 for “all other” entities that have not yet issued financial statements or made financial statements available for issuance reflecting the adoption of ASC 842
e) The FASB has proposed an additional one-year deferral of the Insurance: long-duration contracts standard. A proposed ASU is expected to be issued early in the third quarter of 2020, with a 45-day comment period.
For further information on the new accounting guidance for public and nonpublic companies, including available PwC resources, refer to the Effective dates for new FASB guidance page and see our In depth
, How to apply the FASB’s deferral of effective dates
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