Corporate accountants rarely lack for work. Their normal workload includes lots of transactions to process, monthly/quarterly/annual closes, audit prep work, researching new accounting regs, cleaning up integration files, creation of special schedules, developing accruals and reversals, etc. But the COVID-19 pandemic really added to their full workload. It’s a story that’s gotten little notice or appreciation.
Accounting for COVID-19 Costs - EBITDA-C
There’s a new accounting term present: EBITDA-C. It stands for earnings before interest, taxes, depreciation, amortization and, this new piece, coronavirus pandemic costs. Businesses will want to take special write-downs due to a variety of actions they’ve taken in response to COVID-19. These costs may include:
- Office closures
- Non-refundable airline, hotel and other travel costs
- Cancelled meeting costs not covered by a force majeure contractual protection or insurance
- Special one-off contractual discounts given to severely impacted customers
- Additional procurement costs due to product shortages, closed international borders, etc.
- Employee furlough/layoff and other restructuring costs
- Purchases of PPE (personal protection equipment) such as masks and gloves
- Modifications to buildings to enforce new personal spacing rules and improve employee/customer safety (e.g., partitions, shields, touchless payment systems)
- Obsolete or spoiled inventory (e.g., food in restaurants when lockdown orders were given)
- Systems costs to accept new orders, transactions, etc. digitally
- Special one-time costs to transition to a new business model (e.g., going from being a sit-down restaurant to a take-out only place)
- Training costs to help remaining employees understand new security, health and other requirements
- Early retirement of some assets (e.g., airplanes that are no longer needed, excess office space and office equipment, etc.)
- One-time costs to repurpose production assets to make essential products (e.g., ventilators) (Did your accounting group develop new cost accounting standards for this work?)
- New software licenses to permit new work-from-home (WFH) employees access to on-premises systems
And, for those firms that actually grew during the first half of this year, they experienced a number of one-time costs, too. These included special recruiting, onboarding and training costs for the new people they hired.
All of these costs should be captured if a firm is to accurately account for the unique, and hopefully, one-time, nature of this pandemic. These financial aberrations will be something board members, shareholders and Wall Street will want to see and understand.
And, the accounting gets further complicated as some costs may get different treatment on a GAAP vs. non-GAAP basis and on a GAAP vs. IFRS perspective. Revenue Recognition (RevRec) issues can also pop up if companies had leased solutions or offered ‘as-a-service’ solutions to customers and those customers needed to alter the terms of those deals, have some subscription fees forgiven, or prematurely cancelled those arrangements outright.
There are a significant number of these costs that must be tallied. Businesses with newer, cloud-based accounting solutions with their user-definable code block fields might make this task easier. Manual, heavily customized, paper-based and/or spreadsheet-intensive environments will fare worse.
Accounting software vendors don’t seem to have much to say about these activities; however, most large accounting firms have posted a number of blogs and newsletters on the subject.
Finance and the new planning requirements
The frequency of business planning activities jumped almost exponentially once the pandemic started hitting in full force. Finance is knee-deep in creating a number of new plans as the effect of the pandemic continues to ebb/flow across geographies and governments react to these changes.
Planning schedules are being created to model a variety of business situations:
- Potential changes in sales, product mix, channel/direct changes, etc.
- Impact of future job cuts, pay cuts or benefit cuts on retention, new hiring costs, new training requirements, etc.
- Impact of shortages on key sales and production plans
- Shifting product availability issues from country to country, plant to plant, etc.
- Evolving customer tastes and impact on sales
- Effect of layoffs, re-hiring, etc. on the P&L
- Probable restart costs by location
- Different restart options (e.g., by type of worker, location, job function, etc.)
- New real estate needs and potential savings from disposing of excess space
- Willingness of workers to return to work if asked to take pay cuts, reduced hours, etc.
And much more…
The key planning schedules may be the ones that help the company model its cash reserves through all three phases of the pandemic: the firefighting stage, the bottom or stabilization stage, and, the growth or recovery stage. Each stage will require capital and careful attention to this will be a major survival activity. Finance will be front and center as it often possesses the data, supporting transactions and the analytic chops to understand the outputs and their implications.
These planning tasks will be frequent, intense and subject to many changes in a collapsed timeframe. Some of the planning challenges will include:
- Uncertainty regarding government actions (e.g., shelter in place) and programs (e.g., CARES)
- Not all risks re: customers and their financial condition may be known at the time of a planning event
- Likewise, some supplier risks may be sub rosa
- Some tenants or sub-leases may default on their rental agreements
- Your firm may be barred from collecting some sums from some customers, tenants, etc.
- Bad debt allowances and legal costs may rise above normal levels
- Your industry may face deep, long-lasting structural change
Research issues for Finance
Amidst all this new work for Finance/Accounting, there will also be a number of accounting questions that must be addressed. These might include:
- If your firm forgave some (or all) of a customer’s trade debts, have these been correctly recorded? Likewise, if your firm received these kinds of accommodations, have you considered the tax ramifications of these?
- If you extended a customer’s payment terms due to their deteriorated financial condition, have you also increased your bad debt allowance?
- Can you determine if your goodwill and possibly other assets are impaired given the layoffs, permanent/semi-permanent closings, etc.?
- Will WFH trigger new tax nexus issues?
- If your firm had marketable securities, have these been revalued during the wild stock market swings? Were these changes in valuations booked to your financials and properly documented?
- Are some of your capital borrowing covenants (e.g., to lease fleet vehicles) no longer in compliance? Can your firm make up any short-falls?
And, the changes don’t stop with the above. Finance groups should also examine audit-related issues like:
- Could your external auditors think your firm should no longer be classified as an on-going concern?
- Is Finance documenting the dates when different recognized and unrecognized events occurred?
- How will the year-end audit be affected and will it be completed virtually?
- How is Internal Audit functioning in a WFH world?
This is an evolving space.
For those businesses that took advantage of the PPP (Paycheck Protection Program), Finance will need to collect documentation to get some or all of these loans forgiven. This effort will require co-ordination and data from your firm’s HR department.
Other federal programs, whether part of the CARES legislation or other acts, may require additional data from Finance. This is especially true for those firms in select industries (e.g., airlines) that took government bailout loans.
Odds ‘n ends
And, it wouldn’t be Finance if there weren’t plenty of other new, one-off challenges to confront. For example:
- (Benefits) If, during the pandemic, changes were made to employee benefits (e.g., your firm is no longer matching 401K contributions), have the appropriate adjustments been reflected in the accounts?
- (Tax) If your firm accepted PPP or other government financial assistance, the tax implications of any forgiven loans is still unclear. Likewise, government funds that were used to cover some payroll, rent and other costs may not be deductible either. All of these items need clarification.
- (Supply Chain) Is your firm’s failure to supply its customers generating late delivery penalties? Has someone researched whether these penalties apply during a force majeure event?
I’m sure there are many more issues just like these waiting to be dealt with.
- Do not underestimate the workload and technical challenges confronting financial accounting groups today. Their workload has undoubtedly increased and it may remain challenging as some Finance employees are struggling to balance work while home-schooling their children or caring for sick family members. Sadly, some Finance staff may require hospitalization/convalescence and/or outright perish from this disease.
- Expect many new line items and entries on forthcoming financial statements. Like the EBITDA-C line item, change is in the air. Other line items for government loans will also appear. All of these pandemic-related costs, loans, etc. have financial impacts but so will changes in your firm’s business model. And, if the financials change, so must the planning tools.
- No one has a crystal ball – it will be impossible to predict all the twists/turns that COVID will take – You should expect plans to continue to morph as new data, assumptions, governmental regulations, and the competitive environment become known. Continuous attention to the evolving business climate will help in crafting ever more useful plans and forecasts.
- Cash remains king – Finance must manage what is likely the most important asset to mind right now.
Finally, Finance isn’t the only back office group that’s working overtime. Here’s a look into what HR is doing in this companion diginomica article.