2020 Audit Considerations for Businesses

This blog post was originally published on November 24, 2020. It was updated May 27, 2021.

For many businesses, 2020 was challenging, to say the least. So much has changed and keeps changing, making historical data less reliable and future projections more complex. It’s no surprise that audits will also be more challenging – and may be more time consuming – for 2020.

When it comes to financial reporting, there are many factors to consider that have become more complex due to the COVID-19 pandemic. Here are a few of the most notable for you to address with your auditor.

Long-lived assets and goodwill impairment

Long-lived assets (such as intangibles and fixed assets) and goodwill should be tested for potential impairment when events indicate that the assets may not be recoverable (i.e., a “triggering event”). Depending on your business, the COVID-19 pandemic could be considered a triggering event.

Different assets have different recoverability tests and there is an order to the testing, so be sure to consult with your auditor before you perform any impairment testing. You also want to make sure you and your auditors agree on the timing of the impairment testing. New rules were released in March 2021 that allow private companies to test for goodwill impairment at the end of each reporting period and not during the reporting period.

Ongoing uncertainty as to the length of the pandemic and its continuing impact on the economy could present challenges in performing cash flow projections, which are used in the impairment analysis. Additionally, once an impairment loss is recorded, it cannot be reversed.

Inventory

Stay-at-home orders, temporary closures, supply chain issues and changing market dynamics may have left inventory sitting on the shelves. For certain businesses, inventory may have become slow-moving or obsolete.  Management will need to determine if the value of the inventory has diminished and if so, may need to write it down to net realizable value.  Auditors will need to evaluate management’s calculations and conclusions.

Receivables

When it comes to accounts receivable, your auditor needs to determine if the allowance for doubtful accounts estimated by management is reasonable given the current financial situation. So many companies are facing cash flow challenges, management may need to take a closer look to determine if the amount recorded as an allowance is appropriate. There are various factors to evaluate such as trends in the industry, customer credit rating and their ability and intent to pay. In the unusual year that was 2020, historical information may not be indicative of future collections, making this information more difficult to estimate in 2020 than in prior years.

PPP forgiveness and related loan covenants

Has your business received a Paycheck Protection Program (PPP) loan? If so, did you verify whether your existing loan allowed you to take on more debt? If your loan agreement restricts additional borrowings, did you discuss obtaining a waiver? If your PPP loan had not been forgiven by year-end, be aware that it may remain as a liability on your balance sheet for 2020.

You should also consult with your tax advisor to understand how the receipt of the PPP loan may impact your 2020 income taxes. Based on a recent IRS ruling, generally if you are expecting to obtain forgiveness of the PPP loan, the expenses paid with the PPP loan are deductible in 2020 but you may still need to amend your estimated tax payments.

Debt modifications and lease concessions

Is your company meeting its financial covenants? Is your landlord or lender granting any lease concessions or debt modifications to help you with cash flow? Debt modifications and lease concessions may impact financial reporting. Consult with your auditor as soon as possible regarding the impact of any modifications in this area.

Other implications of stimulus and government aid

Be careful with grant terms. For example, if an organization has a grant that covers certain expenditures including payroll, and it also obtained a PPP loan that covers payroll, the organization may be violating the terms of its grant agreement. Consult with your grantor for guidance as communication may be your best defense.

Going concern

Finally, management must evaluate if there are conditions and events that raise substantial doubt about the company’s ability to continue as a going concern within one year after the date the financial statements are issued or available to be issued.

Has the pandemic impacted your ability to meet your financial obligations as they become due? If so, then it is possible substantial doubt exists and appropriate disclosures may be required including management’s evaluation and plans. These disclosures are designed to enable the users of the financial statements to understand the situation.

As your business gets ready for its 2020 audit, the bottom line is this:  Be proactive. Have early conversations with your management team as well as with your auditors about how the COVID-19 pandemic is impacting your business. Talk about the elephants in the room. Do you have enough capital? How is your cash flow? What is your monthly burn rate? Are you able to meet your obligations? Are your investors willing to put in more capital or loan money to the organization, if necessary?

Audits for 2020 are not business as usual. Contact your Kaufman Rossin professional to learn more about what this means for your organization.