In April 2020, the Securities and Exchange Commission (SEC) Office of the Chief Accountant (OCA) issued a public statement titled “Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19.” In this public statement, the OCA emphasized the need for high-quality financial reporting. The Chief Accountant notes that the U.S. financial reporting system is the basis of our high functioning capital markets, providing information relied upon by investors and other stakeholders across the globe.
The OCA noted that it has attempted to take a proactive approach working with market participants to help ensure the continuation of high-quality reporting.
The Chief Accountant structured his comments around the OCA’s efforts in three primary areas: accounting, auditing and international.
Generally Accepted Accounting Principles (GAAP) require that reporting entities make significant judgments on many key financial statement line items. These judgments are critical, and an entity’s assumptions, models and studies must be well documented. In his remarks to the American Institute of Certified Public Accountants (AICPA) National Conference on Banks and Savings Institutions in November 2019, the Chief Accountant also emphasized that the SEC has always supported well-reasoned judgments.
Financial reporting is challenging in normal times, and as stated above, routinely requires significant judgments. However, the impact of COVID-19 is still not completely known. Some experts believe that it may take many months or even years for the economy to return to its pre-COVID activity. When forming its judgments on accounting topics, an entity’s management must consider economic forecasts, interest rates and other economic data, often relying on models. COVID-19 is likely to have a continuing impact on these metrics and models, and therefore on the judgments and estimates over a number of many accounting areas such as, but not limited to:
- Fair value and impairment considerations;
- Debt modifications or restructurings;
- Revenue recognition;
- Income taxes;
- Going concern;
- Subsequent events; and,
- Adoption of new accounting standards (e.g., the new credit losses standard).
In all of these cases, the OCA emphasizes the need for meaningful disclosures around an entity’s judgments.
The OCA noted how it has been working with the Public Company Accounting Oversight Board (PCAOB) to address COVID-19 related issues. Specifically, the OCA notes that the PCAOB has granted relief for 45 days from inspections, and that it has suspended all international travel for non-U.S. firm inspections until further notice.
The OCA noted that it has been working with the International Accounting Standards Board (IASB) and other international standard-setters in a coordinated response to financial reporting matters related to COVID-19.
DHG will continue to monitor the SEC and OCA responses to COVID-19 and summarize those actions in future releases. For questions or more information, please reach out to us at firstname.lastname@example.org.