Accounting Challenges for Businesses During COVID-19 and How to Address Them
Accounting Challenges-min

Accounting Challenges for Businesses During COVID-19 and How to Address Them

Businesses worldwide are severely affected by the economic implications of COVID-19, forcing them to realign their business operations, cut costs, and reduce their workforce. Other companies are left with no other choice but to close for the foreseeable future. 

Due to such measures, financial stability became the top priority for many companies. In a bid to maximize their resources and stay afloat. That said, problems in auditing and accounting rose as the pandemic continues to pose uncertainty for many.

To help your company address financial difficulties during the pandemic, this article will discuss accounting challenges you may encounter and provide recommendations on how to overcome them. 

The Impact of COVID-19 on Businesses in the Philippines

When COVID-19 started spreading in the Philippines, the government placed the country on lockdown, significantly affecting business activity. The Asian Development Bank’s study on the impacts of COVID-19 on Philippine businesses stated that as of July, around two-thirds of businesses temporarily closed, with 29% reducing their operations. 78% of businesses are operating at half capacity, while only 3% managed to continue operating at full capacity. 

Liquidity became a serious concern for many as quarantine and social-distancing protocols persisted. The bank’s study also claimed that two-thirds of their respondents had run out of cash and savings by July. 

Finances are at risk due to the many restrictions that significantly affect the accounting procedures needed for companies to function at full capacity. 

#1: Going Concern

One of the primary accounting challenges that businesses face today is defining whether their financial capabilities would suffice during the COVID-19 pandemic. Companies must assess whether they have the resources to service their debts when preparing financial statements such as interim or quarterly financial statements. These assessments will determine if they can continue as a going concern

Going Concern is an accounting term that refers to a company with enough resources to meet its obligations and continue to operate for the foreseeable future. This term also refers to the company’s financial capability to remain afloat or avoid bankruptcy.

There is a two-step evaluation process your business must undergo when assessing for going concern: 

  • Do conditions and events, in the aggregate, result in a conclusion where substantial doubt is raised?
  • Are management’s plans to address the facts and circumstances probable of relieving substantial doubt?

It is best to consider how temporarily or indefinitely the ceasing of operations will account for liquidity. You should also consider aspects such as accessibility of the necessary funding or capital, the declining value of existing assets, and employee fluctuations.

The goal is to reduce, or even eliminate, the substantial doubt surrounding the feasibility of your company’s operations while preparing your financial statements. You can consider aspects such as assets, savings, and other methods to decrease substantial doubt and help your company stay afloat. 

#2: Impairment of Assets

As the COVID-19 pandemic persists, many organizations may have realized that some of their assets are no longer recoverable. This is why it is vital to test assets for impairments as soon as impairment indicators become visible. Spotting possible impairments can be beneficial as your company can place measures to prevent any losses that may harm your company’s performance in the long term. 

There are two categories when finding impairment indicators in your assets:

  • External Impairment Indicators: 
    • Observable indicators of a decrease in value;
    • Significant changes with an adverse effect on the entity have taken place during the period in the economic environment in which the entity operates or in the market the asset is dedicated; and
    • The carrying amount of the net assets of the entity is more than its market capitalization.
  • Internal Impairment Indicators:
    • Assets becoming idle;
    • Evidence that economic performance is worse than expected;
    • Plans to dispose of an asset; and
    • Plans to restructure.

Practicing care and significant judgment when performing an asset impairment test will ensure your company’s assumptions are reasonable and valid under conditions existing as of the reporting date. Additionally, due to such assumptions being subject to uncertainty, it is wise to provide more detailed disclosure in your financial statements. 

#3: Revenue Recognition

The estimation process of existing customer contracts is significantly affected since most customers are likely to change their contracts to cater to their needs during COVID-19. If customers have variable considerations such as discounts, rebates, and bonuses, you will need to estimate the variable considerations and their effects on the transaction price. These will help you assess whether to constrain such variable considerations. 

These requirements may become a challenge as you will need to consider the pandemic’s impacts on your business and the uncertainties involved in the estimation process. The crisis could also result in businesses modifying their contracts with customers, such as the scope or price.

A five-step process is usually applied to address the challenges in recognizing revenue and areas that will require significant judgment when auditing. The process is as follows:

  1. Identify contracts with the customer;
  2. Identify separate performance obligations;
  3. Determine the transaction price;
  4. Allocate the transaction price to the separate performance obligations; and 
  5. Recognize revenue. 

This auditing process will help you recognize revenue amid the pandemic, assessing and negotiating contracts changes with your customers to ensure that you continue to gain revenue despite the need for modification and amendments on the clients’ part. 

Overcome Your Accounting Challenges Amid the COVID-19 Pandemic

The COVID-19 pandemic is pushing businesses to maximize their finances to stay afloat. The accounting challenges cited in this article are only a few examples but with efforts and procedures from accounting regulations, you can take measures to overcome other challenges in the long run. 

Ensuring that your accounting reports and files are thoroughly analyzed is key to maintaining a healthy and progressive report despite the global crisis. If you want to tackle such challenges confidently and without hassle, you can always approach an accounting, bookkeeping, and tax services provider to guide and help you with your accounting needs. 

Leave a comment