Accounting and Financial Reporting Implications of Recent Changes to the Business Operating and Economic Environment

More About | Risk Advisory | COVID-19

Changes to the operating and economic environment beginning in March 2020 as a result of the COVID-19 health crisis may require entities across numerous industries to pay significant attention to a number of accounting judgments and estimates in their next financial reporting cycle as well as the impact on internal control over financial reporting. Judgments and estimates concerning whether certain assets are impaired such as goodwill and other intangibles, inventory, investments, receivables, facilities and equipment and other long-lived assets are some of the potential areas requiring significant attention in the current environment.

Estimates of collateral values used in determining loan loss reserves may become increasingly complex in the current environment such as those related to auto loans, aircraft leases and commercial real estate among others. Greater use of qualitative adjustments may be needed when using models to value assets, forecast cash flows and estimate loan losses including expected life of loan losses for entities that have adopted the new CECL accounting standard in 2020 or follow IFRS 9. Other accounting and financial reporting areas that may be significantly impacted include income taxes, investments, mortgage servicing rights, debt restructurings, leases, revenue recognition, subsequent events and going concern considerations.


The time periods over which entities can develop reasonable and supportable forecasts for estimating life of loan losses under CECL or IFRS 9 may have shortened for a number of loan portfolios as historical data likely does not contain information corresponding to an event such as the current COVID-19 crisis. The significant government support measures taken in response to the crisis should be also be considered when forecasting and developing assumptions regarding what will happen with different types of borrowers and industries (i.e. airlines, hotels, restaurants, commercial real-estate) post-crisis. As a result, updates to model reversion and/or qualitative reserving approaches to reflect the impacts of COVID-19 may be needed.

Valuation and Cash Flow Models

Assumptions used in valuation and cash flow models may need to be recalibrated and supported when estimating fair values and determining whether certain assets are impaired. In some cases, valuation methodologies may need to be adjusted to consider the relevance and ability to apply previously used methodologies in the current environment. Entities may determine significant qualitative adjustments to model outputs are required to address potential significant impacts of the current operating and economic environment on certain model parameters and assumptions.

Internal Controls

Entities should determine that internal controls over significant accounting judgments and estimates, including those over the use of models, continue to be sufficiently designed and operating effectively in the current environment. Impacts to management’s assessment of internal control over financial reporting will need to be assessed including scoping materiality, modifications of existing controls and/ or implementation of new controls. The impact on internal control over financial reporting resulting from the inability of personnel to perform controls in the same manner as before or reduced availability of information to perform control as designed due to a higher number of employees working remotely should also be included in management’s assessment. Changes to internal controls as a result of disruptions at third party organizations that are part of internal control over financial reporting may need to be made and included in internal control compliance programs such as those used to support management’s assertions under the Sarbanes Oxley Act of 2002.

How DHG Can Help

DHG’s multi-disciplined teams of model risk management professionals, valuation professionals, accountants, auditors and industry subject matter resources are available to discuss these areas further and assist you in assessing and adapting your current practices, policies, procedures and controls to address the impacts of the changing operating and economic environment.

Additional resources regarding the accounting and financial reporting implications of recent changes to the business and operation environment as a result of COVID-19 can be found at