Complicated issues with contract accounting are likely to arise as customers defer orders and construction contracts are put on hold. In South Korea, for example, companies are concerned about the possibility of export contracts being canceled due to the uncertainty in key markets, particularly the US and India. Finance teams can expect to consider contract modifications and whether existing contracts have effectively been extinguished, with new contracts being issued.
Businesses — especially financial institutions — are likely to suffer credit losses as the economic fallout from the pandemic continues. Increasingly, banks will be expected to make provisions for potential bad loans. In March, the International Accounting Standards Board issued guidance to companies on the measurement of expected credit losses, emphasizing that IFRS 9 Financial Instruments should not be applied mechanically and that prior assumptions may no longer hold true in the current environment. Given the level of judgment involved in applying IFRS 9 in the present circumstances, transparent disclosures in this area will be critical.
It is common for businesses in certain sectors, such as aviation and retail, to have significant lease obligations. If organizations cannot find ways to reduce these obligations — at least while their cash flow is diminished — they may simply have to exit from these leases, which may threaten the viability of the business. In China, retailers sought to address this issue by proactively negotiating rent waivers and discounts with their landlords, while in Singapore, the Government has stepped in to mandate certain rebates to be given by landlords to tenants. These can trigger complex lease modification and government grant accounting issues.
A number of our clients are spending significant amounts restructuring their businesses as a result of COVID-19. Furthermore, some have adjusted their business structures to function within the constraints of social distancing. This may raise accounting issues around the timing of recognition of provisions and employee expenses.
The ability of companies in Asia to continue as going concerns has been partly supported by government actions. In China, for example, the Government has provided support to businesses in certain sectors, and many of its largest businesses are state-owned. The Singapore Government has introduced many stimulus measures to mitigate the economic impact of the COVID-19 pandemic, such as wage subsidies for employers and low-interest, government-assisted bank loans for small and medium-sized businesses.
Despite these measures, the crisis will inevitably lead to corporate failures and render the going concern basis of accounting unfeasible. The risk will be greatest for those businesses that were already thinly capitalized before COVID-19 struck.
New revenue models
Some organizations will have developed new revenue models due to COVID-19. For example, they may have developed online subscription services. These services will need to be correctly accounted for to ensure they provide an accurate picture of the organization’s financial health at any given point in time.
3. Internal controls
The large-scale shift to remote working is making it harder for some companies to exercise their internal controls as they were initially designed. This is a challenge for South Korea, for example, which has recently implemented Sarbanes-Oxley-style controls. Companies in the US — particularly small and medium-sized companies that have limited resources — may also find it challenging to effectively apply controls, such as segregation of duties, in a remote environment.
4. Raising capital
In 2010, many companies refinanced themselves in the wake of the global financial crisis, so a lot of debt issued then is coming to maturity this year. Many South Korean CFOs are therefore looking at how they can refinance or recapitalize their businesses. The challenge for them — and for CFOs in other markets — is that notwithstanding the unprecedented loosening of monetary policies by many central banks, commercial banks may take a more conservative approach to lending as they start to incur or anticipate higher credit losses. In both Hong Kong and South Korea, companies have had to delay planned IPOs — closing another avenue for capital raising. Like their peers in Asia, US CFOs seem to be anticipating difficulties in this area. In fact, as the crisis has unfolded, we have seen some companies use credit lines to access cash they have no urgent need for but intend to hold in reserve.
5. Employee engagement
Employee welfare has been front of mind for organizations in Asia during the pandemic. Organizations have acted swiftly to enable remote working for staff, where possible. Nevertheless, plummeting revenues have threatened jobs and livelihoods. In many companies, executives have taken substantial pay cuts to help reduce payrolls and maintain staffing levels. Pay cuts have also been commonplace at other levels. In China, staff in various industries took pay cuts of up to 50% to enable their organizations to navigate the worst of the crisis.
6. Engagement with customers and suppliers
Finance teams in Asia are working alongside operational teams to engage with customers and suppliers. Payment terms are a means of providing support — they can be extended for stricken customers or sped up for struggling suppliers. The crisis also created opportunities for organizations to collaborate with their suppliers. For example, Chinese retailers worked with their vendors to launch online promotions of specific products. Now that the Chinese economy is recovering, organizations are proactively offering discounts to customers — a trend that is particularly evident in the hotel and property industries.
7. Communication with shareholders
Transparent financial reporting underpins effective communication between companies and their shareholders. Finance teams in Asia realize that quarterly and half-yearly reporting present opportunities to build trust with shareholders, especially around sensitive issues, such as dividends, asset impairment and going concern. Nevertheless, the rise in virtual annual general meetings requires finance teams to think carefully about how they enable effective shareholder engagement. For example, companies may need to provide further updates outside of formal reporting windows. In Singapore, which has just moved to half-yearly reporting for listed companies, some companies have retained quarterly announcements on a voluntary basis.
Now, next and beyond
It is clear that finance teams, both in the US and Canada, will have to continue to manage the impact of COVID-19 on their organizations for the foreseeable future. So, what should they be thinking about now, next and beyond?
- Focus on the “three Cs” — cash, costs and credit. Perform a comprehensive review of all cash flows, take control of expenses, undertake immediate renegotiations with suppliers and apply for government loans and aid where these are available and needed.
- Study the patterns and trends in different markets for both the current and the previous quarters. Use scenario planning to anticipate different future situations and develop a response to them.
- Use purpose to inform all organizational decision-making at this critical time.
- Don’t lose sight of the long term. In a crisis, it’s easy to focus on short-term survival, but any decisions taken should also bear the future in mind.
- Revise the organization’s budgets, strategy and structure for the medium term. Where possible, ask for external benchmarks (e.g., economic reports) that help support the forecasts. Devise a plan that allows the organization to respond to evolving customer demand and emerging risks while remaining resilient.
- Explore how the organization can use technology to transform its business. There will be opportunities to drive efficiency by automating processes and using data more effectively.
- Capture the results of how COVID-19 is impacting the business so they can be used as a reference in the future.
- Communicate clearly and openly with investors about what the organization is doing to improve liquidity, reduce costs and revise strategy.
- Think strategically about what the new normal will look like — for both your organization and its sector. How can your organization adapt its business model to thrive in a post-COVID-19 world?
- Explore opportunities for the company to operate differently in the future. For example, will greater use of remote working and video conferencing allow the organization to reduce expensive office space and cut travel budgets?
- Review your organization’s purpose. Will its current purpose — as it relates to customers, employees and shareholders — still be relevant in the future?
Above all, keep in mind the need for agility and flexibility; circumstances can change quickly, and CFOs will need to be prepared to change course if necessary.