Corporates in the COVID-19 world continue to experience the effects of the pandemic. In managing these, CFOs have focused on key areas gathered from deliberations by crisis management teams and boardrooms as well as observed from other companies.
Even as economic and business climates evolve, common challenges across sectors remain relevant. As we move to the last quarter of the calendar year, allow us to highlight lessons learned in three areas: financial reporting; cash and liquidity; and engagement with customers, suppliers and shareholders.
The pandemic brought about key financial reporting issues that had to be addressed by financial statement preparers.
For example, impairment indicators on assets, including goodwill, may be observed in certain manufacturing, retail, hospitality and real estate concerns which operations have been hampered by the current situation. While these indicators may not necessarily translate to impairment losses, these companies will need to perform more rigorous impairment tests to determine any impairment losses that they will need to recognize in their financial reports.
The deterioration in credit quality of receivable portfolios as a result of the pandemic will have a significant impact on expected credit losses measurement. Given the uncertainties, incorporating the specific effects of the pandemic and government support measures on a reasonable and supportable basis pose challenges in the measurement. When it is not possible to reflect such information in models, post-model overlays or adjustments would need to be considered.
As a result of the pandemic, some companies see significant costs in restructuring their businesses and in reconfiguring workplaces and adopting systems in order to continuously operate even within the constraints of social distancing and remote working. This may reveal potential financial reporting issues when it comes to the timing of recognition of employee expenses and provisions.
New revenue models were developed or accelerated due to COVID-19, such as the use of online platforms. Certain contracts have also been revisited or modified. These will need to be correctly accounted for to ensure they give an accurate picture of a business’s financial health.
These are examples of the financial reporting considerations and the applicability depends on the related facts and circumstances. CFOs are proactively engaging management, Audit Committees, Boards, auditors and advisors as they develop the comprehensive assessments and reflect the impact in financial reports.
CASH AND LIQUIDITY
The slowdown in economic and business activities vis-à-vis cash requirements placed cash and liquidity management at the forefront of the corporate agenda. Finance teams employ several techniques in managing liquidity, including but not limited to cash flows forecasting, more proactive budget review and cash flows management.
Cash flow forecasting and budget reviews, in the near and medium term, incorporate various scenarios supported by economic modelling where possible. These scenarios show different types of recovery (V-shaped, U-Shaped, L-Shaped, etc.) as a single cash flow forecast will not be enough to sufficiently address the uncertainty that prevails in most organizations. Management customizes the responses based on these scenarios.
An agile approach to forecasting is also utilized, such as performing forecasts that are typically between one and three months in length, taking into account the fluid nature of current events. This activity includes a comprehensive review of cash sources and uses such as those from trade debtors and creditors and credit lines.
Cash-flow prioritization includes reducing certain expenditures such as those for advertising and marketing or deferring projects to the extent that these do not adversely affect revenue or cash generation.
A specific area of liquidity risk lies in leases, especially in sectors where businesses commonly have significant long-term lease obligations such as retail. If businesses are unable to reduce these obligations, particularly during this period where their cash flow is diminished, they may be constrained to close certain branches or outlets or even the entire business. Locally, property owners have already offered rent concessions such as deferred payments or rental based on percentage of sales to retailers, among others. Government has also sought to ease the burden of these obligations on lessees and businesses by enjoining property owners to ease lease payments.
ENGAGEMENT WITH SUPPLIERS, CUSTOMERS AND SHAREHOLDERS
Finance and operational teams are working together to actively engage suppliers and customers in negotiating payment terms, accelerating collections and crafting new arrangements. Payment terms can be made a means of providing support, where they are extended for stricken customers or sped up for struggling suppliers.
Companies are taking more than a near-term view with respect to relationships with suppliers and customers. This will help ensure a functioning ecosystem during the recovery period.
Meanwhile, transparent financial reporting reinforces effective communication between businesses and shareholders, with periodic reporting presenting opportunities to build shareholder trust. This is particularly true around sensitive issues such as asset impairment, dividends, and going concern.
It should be noted that the rise in virtual annual general meetings requires finance teams to carefully consider the potential need to provide further updates outside formal reporting timelines.
STRATEGIZING FOR TOMORROW
Managing the impact of the pandemic on financial reporting, liquidity and engagement with various stakeholders are pressing matters that will need to be addressed swiftly. However, companies will also need to take a long-term view by thinking about how the new normal will affect their business models and workplaces. They need to review the organization’s purpose as well as how they generate long-term value to stakeholders.
As a strategic partner, CFOs must be nimble and flexible as they help the companies navigate in unchartered territories.
This article has been adopted from the EY article, “Seven corporate reporting lessons from Asia’s experience of COVID-19” by Peter Wollmert, EY EMIA Assurance Leader.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Aris C. Malantic is the Financial Accounting Advisory Services (FAAS) Leader of SGV & Co. and EY ASEAN FAAS and Market Group 7 Leader of SGV & Co.