Balancing Return to the Workplace with the New (Ab)Normal of Financial Reporting

by Wes Bricker

As we head into Q2 close, there a few important things to keep top of mind.

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In Q1, we saw the unprecedented impact that a global pandemic had on the capital markets. With companies forced to adjust their operations in response to COVID-19, we experienced a quarter close unlike any of us had ever experienced before. And, while some businesses have begun a gradual transition back to the workplace, it is essential that we not let our guard down too quickly and assume that financial reporting has returned to normal.

In fact, as evidenced by the most recent unemployment numbers and a number of companies filing for bankruptcy, we are still in the heart of this economic storm. Businesses are likely to continue to face a challenging road ahead, which will prolong the financial reporting environment we’re faced with.

As we head into Q2 close, there a few important things to keep top of mind:

  1. Don’t Forget About Q1 Lessons Learned: As companies continue to face extended periods of operational closures and/or reduced business, they’ll be more likely to rely on cash reserves to meet financial obligations, like payroll, lease payments and more. This scenario escalates questions of risk, liquidity and going concern, because some companies are likely struggling to create revenues in order to sustain/cover the cost structure during this time. While the calendar has turned from Q1, those lessons learned last quarter are just as relevant now and will continue to require an added emphasis and significant judgments.
  2. Recognize New Challenges Presented in Q2: The second quarter also saw many companies receive federal relief from the CARES Act as a form of short-term financial stabilization in response to the market volatility. While companies may want to disclose what the business looks like on a go-forward basis without the short-term government support, they might also need to consider the financial reporting implications. Specifically, the accounting and disclosure implications of certain provisions in the stimulus package, like income tax implications or the potential for the Paycheck Protection Program (PPP) loan forgiveness in their financial reporting.
  3. Remember That Cash Remains King:  Cash and liquidity are going to remain top of mind for all participants in the capital markets. As such, adequately identifying and responding to liquidity risks, as well as other related impacts, is foundational to a company's ability to assess its business continuity, and management must remain especially vigilant to ensure this area remains a high priority.

We’re not out of the woods yet and the road ahead, for the foreseeable future, remains complex. Preparers and external auditors will address challenges throughout the process and should err on the side of transparency. Ultimately, management needs to ensure that the financial statements and other elements of its financial reporting and public disclosures provide decision-useful information to stakeholders about the ongoing impact of COVID-19 on the company, any concerns about its short-and long-term liquidity, and if so, how management intends to address them.

Wes Bricker, PwC Vice Chair, US and Mexico Assurance Leader.