Companies need guidance in dealing in auditing process - Paul Gillis

Paul Gillis

The ongoing coronavirus in China is going to disrupt the regular auditing process, warns Beida professor Paul Gillis on his weblog Chinaaccountingblog. Even for companies who do not get into financial problems, some guidance on how to deal with this crisis and the auditing process is urgently needed, he adds.

Paul Gillis:

Even when there is no going concern issue because the company is adequately capitalized, the issue of whether to accrue corona virus related losses in 2019 or to report them in 2020 is important. There are two significant components to this: 

Most companies will have done little business in January and February, 2020 first because of the normal Chinese New Year holiday and then because of mandatory closures related to the virus. Companies, however, are required to continue to pay employees. Should losses related to the virus be accrued as of December 31?  The event that caused the loss began in 2019.  By the time that financial statements are issued (April or later) the amount of loss can likely be determined. 

Secondly, each company must determine in the preparation of 2019 financial statements if any assets are impaired. Any impairment is recorded as an expense. Of particular concern will be intangible assets such as goodwill. Many Chinese companies have considerable goodwill on their balance sheet due to acquisitions. Goodwill is typically tested for impairment by looking at future cashflows from the related business. Those cash flows have been altered by the virus, and potentially significantly enough that goodwill must be impaired. 

I think it would be useful if accounting standard setters or the Emerging Issues Task Force would issue guidance as to the application of the subsequent event rules to the facts of the corona virus.

More at the Chinaaccountingblog.

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