Financial reporting and related financial statement disclosures are not immune from the virus and will need to communicate all material effects of COVID-19.
Financial reporting and related financial statement disclosures are not immune from the virus and will need to communicate all material effects of COVID-19.
The disruption created by the outbreak of COVID-19 is having a widespread impact on businesses and organizations around the world. Unbudgeted expenses, changes to virtual platforms and uncertainty about future enrollments are some of the many questions and challenges facing educational institutions. On top of this, most are nearing their fiscal year ends and will soon start pulling together information for their financial statements.
Financial reporting and related financial statement disclosures are not immune from the virus and will need to communicate all material effects of COVID-19. Some things to consider are as follows:
In our conversations with educational institutions, it is clear many have had to incur expenses that were otherwise unplanned in response to COVID-19. These related costs may include, but are not limited to:
Current guidance under generally accepted accounting principles (GAAP) (ASC 220-20-20) provides the following definitions/guidelines for the terms “unusual” or “infrequent”:
Material events or transactions deemed to be unusual in nature or infrequent in occurrence should be presented in the statement of activities as a separate component of the change in net assets from continuing operations or disclosed in the notes to the financial statements. Typically, these expenses would be presented as a line item, after a subtotal for total expenses, as a loss, etc.
Schools may need to assess and adjust internal controls in order to properly capture this information, not only for accurate reporting, but to be prepared for the possibility of reimbursement of these costs. As federal legislation evolves, funding may become available through state channels to reimburse non-public schools for qualifying costs.
In addition to understanding practical guidance for reporting unexpected costs, institutions should also be aware of the potential impact on various financial statement note disclosures related to future operating results, cash flows and financial position. The following are areas that may need to be considered.
Educational institutions will need to assess the consequences, if any, of COVID-19 on “events and transactions that occur after the balance sheet date but before the financial statements are issued or available to be issued” (FASB ASC 855). The impact of certain events and transactions would require adjustments to the financial statements at the balance sheet date (recognized events) and others would require disclosure only (non-recognized). For example, an institution may determine that a material contribution receivable is uncollectible prior to issuing the financial statements, requiring consideration in the estimated allowance for uncollectible receivables at the balance sheet date. Alternatively, it may experience substantial losses in the fair value of financial assets or enter into significant new financing agreements that would likely require disclosure of the event(s). Given the extent of duration of the pandemic, subsequent events will require careful consideration during the preparation of financial statements for the current year.
Another key area of disclosure that will need consideration will be disclosures involving risks and uncertainties in future operations. Most institutions, at this point, have moved to a full-time remote environment for the remainder of the academic year. They have also significantly altered or completely cancelled their summer programs but have yet to conclude whether campus will be open at the start of the new academic year. The answer will become clear by the time financial statements are prepared and to the extent campus remains closed, there will need to be some consideration to any disclosures regarding the extent of the impact on business operations.
The financial statement note disclosures should already include wording alerting the user that actual amounts may differ from the estimates included in the financial statements. Given the uncertain duration of the pandemic or its prolonged impact, educational institutions should be mindful of the potential to include expanded disclosures related to conditions existing at the balance sheet date.
The lingering effects of COVID-19 could give rise to asset impairment issues. Consideration should be given to the following, among other areas:
An educational institution’s ability to continue as a going concern is impacted by several factors, including, but not limited to, its level of liquidity, accessibility to financing, and the uncertainty of what lies ahead, especially regarding enrollment levels and funding from donors. Institutions that have been successful in building reserves over time will likely encounter less uncertainty about their ability to continue operations for the period ending one year from the date the financial statements are issued. Those with little to no cash reserves, little to no accumulated liquid net assets, and which borrow next year’s tuition dollars to complete the current year may be faced with more difficulty meeting their existing liabilities or covenant requirements.
The Financial Accounting Standards Board (FASB) has scheduled a meeting to discuss standard-setting issues during the COVID-19 crisis. Topics of discussion will include:
We will continue to monitor these developments and keep you informed as decisions are announced.
Educational institutions should be sure to maintain open communication with their auditors in order to properly assess these and other potential reporting considerations. During this unprecedented time, we’re committed to monitoring the evolution of the pandemic so we can continue to provide the most up-to-date information and guidance to assist your decision-making. For more information, please visit the COVID-19 resource page of our website.
Disclaimer: The contents of this resource are for general informational purposes only. While every effort has been made to ensure its accuracy, the information is provided “as is” and no representations are made that the content is error-free. We have no obligation to update any content, comments or other information for retroactive or prospective interpretations or guidance provided by regulators, financial institutions or others. The information is not intended to constitute legal advice or replace the advice of a qualified professional. There are areas of the CARES Act where additional clarification from the Treasury Department and the SBA is needed. Your judgment and interpretation of the act may be needed. Users should consult with their legal counsel and representatives of the lending institution regarding the proper completion of their application and supporting documentation.