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Crisis Management

Coronavirus and The Challenges of Controllership

The COVID-19 outbreak has led to constant uncertainty for all companies. This dynamic environment is affecting companies in many ways, all of which need to be measured, tracked, and accounted for by controllers.

FEI’s Committee on Corporate Reporting (CCR) has been meeting frequently to discuss how these changes are impacting controllership organizations, share best practices and inform regulators.  CCR is a technical committee of FEI comprised of about 50 chief accounting officers and corporate controllers from the Fortune 100 and other large public companies.

Due to this unprecedented environment companies are facing both operational and technical challenges. Controllership organizations working from home under shelter-in-place requirements present a unique set of issues, including an increase in distractions and non-work-related tasks and an increased reliance on technology.

Repriortization
CCR members have shared many ways in which they are tackling these operational challenges. Most companies have had to undergo some form of reprioritization. Controllership organizations have had to halt non-essential projects and activities to free-up time and resources to perform essential functions, like remotely closing the books and preparing U.S. Securities & Exchange Commission (SEC) filings. To stay on top of the essential activities, most CCR companies have set up crisis management teams that meet daily to give status updates and to assign new tasks.

Technology Pressure Tests
Increased reliance on technology has led to many challenges for companies. Most companies have systems that were built for a few people to work remotely at any given time rather than being built to handle the traffic of an entire company working remotely. Companies have had to increase VPN capacity, set up function-specific VPNs and access credentials, and limit VPN access to people that are using essential programs. Working with third-party service providers has also been challenging in this environment, particularly those in countries with decreased internet capabilities. Some companies have provided laptops and remote hotspots for third-party providers to ensure they can continue to serve them.

Internal Controls
Control processes have also been affected by the work from home environment. Many controls were previously completed in-person and required physical access to locations or products. Companies have had to review their control documentation and update policies to ensure that key controls can be completed remotely. This includes implementing electronic signature software and using virtual technology for inventory counts.

Financial Accounting Standards
In addition to the various operational hurdles, COVID-19 has brought many technical accounting challenges. One of these challenges is the use of estimates and judgments.  Several financial statement items rely on the use of estimates such as the valuation of goodwill and intangible assets, estimated credit losses, valuation of level three securities, tax provisions, bad debt reserves and many others. Because these estimates rely on expected future cash flows or economic projections, which are currently volatile and uncertain, it has become challenging for companies to establish these estimates. As a result of this uncertainty as well as the recent statements from the SEC, companies are evaluating the detail of the disclosures related to these estimates.

Accounting for lease transactions has also become difficult in this environment. Many companies are providing relief to their tenants by allowing delayed rent payments and other concessions. Under ASC 842, these concessions may qualify as contract modifications, depending on the language of the underlying lease contract. To assess whether there is a contract modification, companies would be required to go through each contract, one-by-one, to evaluate the language in the contract and the extent of the concessions provided to tenants. CCR companies and others raised this issue to the Financial Accounting Standards Board (FASB).  The FASB has subsequently provided an accounting election that allows companies to not evaluate whether the concessions are lease modifications if the changes to the lease meet certain criteria and are related to COVID-19.

Legislative Relief
CCR member companies are also evaluating the CARES Act to determine what relief they may be eligible for and how they can take advantage of that relief. The CARES Act is complex, and it is taking companies significant time to determine what relief they may be eligible for and the associated financial statement impact.

Discussions with Regulators
CCR members have discussed the challenges resulting from COVID-19 that they (and many other companies) are facing with the FASB and SEC. Both the FASB and the SEC were receptive and understanding of the many challenges presented. The FASB and SEC have reiterated to CCR members that feedback from companies is welcome, and if any companies have technical questions, they are always willing to consult with companies on an individual basis.