Bloomberg Tax
March 5, 2020, 4:44 PM

Coronavirus Disruptions to Leave Mark on Financial Reports

Nicola M. White
Nicola M. White
Amanda Iacone
Amanda Iacone

Business disruptions related to the coronavirus have already dinged earnings at some companies and made the likes of Apple Inc., Paypal Inc., and Microsoft Corp. warn investors of likely revenue estimate misses.

As the virus spreads around the globe, its impact will roll throughout company financial statements—from the risk analysis to the footnotes to coming up with the top lines of income statements.

“I would have to say historically on a global scale, this is probably the most challenging time that global companies have had in the area of accounting and taxation,” said Thomas Cooke, a professor at the McDonough School of Business at Georgetown University.

The nature and even location of corporate disclosures related to the virus have evolved since the end of January when the SEC first reminded companies of the need to keep investors informed. The number of references to the coronavirus in the risk factor disclosure increased as companies issued their annual reports, said Dave Brown, a partner with Alston & Bird LLP’s securities group.

The impacts are likely to show up in any of several sections of companies’ reports.

Risk Factors

The risk factors section of a financial statement is where businesses talk about things like competition, pressure on their supply chains, and cybersecurity threats. Coronavirus impacts on factory closures, canceled cruises and flights, or product-delivery problems could appear in this section.

The Securities and Exchange Commission has urged companies to work with their audit committees and auditors to maintain robust reporting despite uncertain business impacts.

The SEC’s key message: Be as transparent as you can be and cover short-term and potential long-term challenges, Cooke said. “The name of the game is full transparency, not sugar coat anything. Tell the truth and the whole truth.”

Companies should also discuss what they are doing to manage those risks and what contingency plans they have in place, Brown said.


It’s the top line in a company’s income statement and one of the first numbers investors look at. Several companies have already disclosed that their revenue could take a hit.

Significant changes to accounting for revenue recognition that went into effect for publicly traded companies in 2018 exacerbate the impact. Under the Financial Accounting Standards Board’s ASC 606, companies can’t recognize revenue until payment collection is probable. Store closures and temporarily shuttered factories can affect that assessment.

In addition, companies have to estimate what’s called “variable consideration”—fluctuating customer payments, essentially—when they’re tallying revenue.

“The estimate may be significantly affected by what’s going on in China or in Italy—or wherever there might be an impact from the coronavirus,” said Bruce Pounder, executive director of GAAP Lab LLC, an accounting consulting company.

Goodwill Impairments

When a company buys another company, it tallies up the cost of the physical goods like factories and machinery, as well as intangible assets like patents and compares that figure to the purchase price. What’s left over is a “goodwill” asset. It represents the deal’s potential to capture new customers and make more money.

Companies must evaluate this asset every year for drops in value. They also must assess it if there’s a triggering event—the stock takes a nosedive or some greater economic event signals trouble.

Fallout from the coronavirus could be such an event, especially if companies have operations or subsidiaries overseas. All the optimism from announcing the original deal can evaporate when the markets slide, said PJ Patel, co-CEO of Valuation Research Corp.

“The markets being down and then less business activity will result in lower earnings, which then could cause companies to say, ‘Our outlook has changed’,” he said.

Companies can’t wait until the typical annual testing period, Pounder said. “This is something where there is, in many cases, present credible evidence they should be checking for impairment now.”

Credit Losses

This year ushered in what’s often called the biggest change to bank accounting in decades—the current expected credit losses (CECL) accounting standard, ASC 326. Instead of waiting for loans to go bad, banks and other businesses must tally up front the losses they expect over the life of a loan or other form of credit. That means banks and other businesses have to consider past experience and assess current conditions to estimate future losses and set aside reserves to cover them.

Questions about the coronavirus could throw those estimates out of whack. If a bank lends to a company that does significant business in a country where workers are under quarantine, it may have to consider the impact.

Less directly, a company may not do much business in, say, China, but one of its suppliers may buy products from a Chinese factory that isn’t operating at full strength. That affects the credit losses calculation, too, said James Gellert, CEO of Rapid Ratings, a company that helps businesses implement the new accounting standard.

“It’s a giant question mark,” he said.

Large publicly traded businesses will calculate their credit losses under the new model in their first-quarter financial statements this year. Most businesses have given guidance on what they expect to report after this spring, but their estimates may need to be revised to reflect the coronavirus, said Laurent Birade, senior director, regulatory and accounting solutions at Moody’s Analytics.

“This is one of the good things that CECL brings to the surface,” Birade said.


A company’s cash flow is important as a sign of its financial health and profitability, not only to investors but also to the banks and other institutions that lend to it. And as sales and revenue dip and rise, companies will need to keep a close eye on cash levels, Alston & Bird’s Brown said.

In some cases, companies may have to prop up a key supplier so that company can remain in business, he said.

“This is another example of the trickle-down effect. You may have to utilize additional cash for things that you weren’t necessarily planning for,“ Brown said.

If cash drops too low, it could impact debt covenants with lenders. And if the debt is rated, companies may have to talk to the ratings agencies, he said.

Going Concern

Maintaining capital, the potential for writedowns, lower earnings—these are some of the challenges companies are facing. But some may struggle to survive the outbreak.

“If they lose a decent-size contract here or there, that in theory could put them out of business,” said Steven Morrison, who leads CohnReznick LLP’s audit quality group. “At the very least, it’s forcing them to scramble a little bit.”

All that uncertainty about the future could result in going concern warnings. Auditors will be reviewing not only the rules for those notifications, but also the plans a company has in place to ward off those threats and whether they would be sufficient, Morrison said.

“Are there conditions or events which raise substantial doubt, and what’s management’s plans to deal with that,” Morrison said.

To contact the reporters on this story: Nicola M. White in Washington at; Amanda Iacone in Washington at

To contact the editors responsible for this story: Jeff Harrington at; Kathy Larsen at