Watch On-Demand Webinar: Navigating the Energy Market During COVID-19
"When we look at this past year with COVID-19, it made for a very interesting year. Some of the more pertinent areas that we've found have been across the area of impairment, modifications to contracts for both leases and debt, restructuring activities, disposals of assets and businesses going concern issues as well as accounting for the PPE loans that were a direct result of events from this year. Given our time today, we're not going to be able to go into a deep dive into all these areas, but we did want to highlight some considerations around these areas and Steve will be going into a bit more detail regarding some of the lease accounting and impairment considerations.
"Let me first start off with the debt modifications and debt restructuring items. As with all contracts, the devil is in the details, especially given whether these are clauses that would address pandemics or if there's a force majeure acts of God categories. So, as with all contracts, make sure you're staying close with your legal counsel to understand exactly how those contracts would be viewed, especially if you're looking at any modifications or terminations of the contractor, or however you're looking to revise. On the accounting side, the analysis starts with the whether your modification, if you're going to do that, is considered a troubled debt restructuring, which is that there is a concession that's been granted to the borrower that's related to their financial difficulties. That's one of the first things that companies are going to want to pay attention to is whether or not they, after having that discussion with their legal counsel, have determined, “Okay, are we able to get out of this?” That will then play into whether or not, as you think on the accounting side, whether or not it's, a trouble debt restructuring, a TDR. Once you've cleared that, it then goes into whether or not you're looking at an extinguishment, meaning that you've basically taking out that previous debt and replaced it entirely new with fresh debt or if you're just modifying that existing debt that you already had. The model does differ a little bit in how it handles what's expensed and what's capitalized in those two situations, so you're going to want to make sure that you're aware of which path you're actually following.
"Also keep in mind, in the case of debt, there is a difference in the model between lines of credit or revolving credit facilities and term loans or debt securities. Another area that we've seen questions coming about is with regards to restructuring activities where companies have been incurring severance costs or exit costs, do to getting out of certain activities or facilities or assets or other consolidation costs. Again, the devil here is going to be in those details in terms of what exactly is the nature of the program because of the different accounting models that come in to effect in terms of if you're just moving people from one location to another, if it's a one-time benefit that's being granted to someone that wasn't part of an already existing severance plan, or how exactly you're putting that plan into effect. It's certainly an area of judgment that people need to be looking at for their companies for how that translates into what their accounting is going to be. Another item that we've listed here are in the areas of disposals of assets and here the accounting considerations fall into whether or not you've met held for sale criteria and in top of that, whether or not you then would go on to say that you've met discontinued operations treatment.
"One of the items that I would highlight for this is the fact that there is, under the held for sale accounting, an exception to whether or not you believe the sale is probable to occur within the next year when there is events outside the entities’ control. Companies are going to want to pay attention to see whether or not, in the case that they have with COVID-19 and government lockdowns, if that's a factor that is going to play into what they need to look at for that timeline to say whether or not something actually does fall under the held for sale accounting criteria. Then on top of that going through to say, under the discontinued operations treatment, where there is slightly different presentation and disclosures that go into that whether or not you're meeting the requirement for discontinued operations treatment as well.
'The next a couple items that we have, let's start off with just the going concern. And one of the things I would like to emphasize is that this past year, if anything has showed more emphasis on the financial forecasts that are used by companies, especially as it fits into how their valuations and assessments go for impairments and going concern assessments, it's certainly an area where you're going to want to make sure that you have those forecast well documented and it's understood how you move from your previous forecast into your current one because of any changes that are happening due to COVID-19, or government lockdowns or other items coming into effect. And it's something that we've also seen some increased auditor scrutiny around that financial forecast information, so it's going to be something that companies are going to want to pay attention to, how they have that document and thought through, because it will be something that you're probably going to be getting additional about questions this year that you wouldn't have necessarily gotten in the past.
"Let’s briefly touch base on the going concern aspect of this. It's the company's initial assessment that they're going to do based upon the data their financial statements being issued. But it's before any plans to mitigate any sort of issues that are happening, so management needs to consider items like operational disruptions, any contractual obligations that are do or that are anticipated to be due within the date of the financial statements, their potential liquidity and any working capital shortfalls and access to existing sources of capital. So, for example, those lines of credit that you're looking at. That initial assessment for going concern, obviously the issue with there is whether or not you're going to have to consider if there is any sort of additional disclosure that you're going to have to put in. You need to make sure that that's based only upon that information that is known or reasonably knowable as of the date of the financial statements.
"For those of you who have a calendar year end where you're going to be filing here in the next few months, it'll be as of that date that you're looking through to say, based upon what we see, do we feel that there's a going concern issue that we're going to have to be addressing. Again, this is an item that we expect auditors to be paying a little bit more attention to, especially for companies that are seeing operational disruption and some of these other factors play into what their budgets and what their financial forecasts are looking like. And then, finally, the PPE loans that have been that have been granted. There's forgivable loans that have been issued out of the paycheck protection program, there actually has been guidance that has been issued by both the SEC and the FASB, with regards to how they expect companies either follow government grant accounting, which is by analogy, to international accounting standards 20, or actually following the debt accounting under ASC 470. Again, this is an item where there's going to be a little bit of judgment that has to be applied in terms of how you are going to choose approach that. Part of it is going to be making sure that you're eligible and as Todd mentioned previously, that there are PPE loans that he's been seeing in this area that you're going to want to make sure that you're eligible on how it's being accounted for to make sure that you're able to address that appropriately."