It’s exceedingly difficult to confront all of your company’s accounting challenges each day when the business environment itself is far from normal.
Since the beginning of March, companies across the country have experienced levels of disruption we have not seen since the Great Depression. Accounting teams have, in many cases, bore the brunt of the slowdown. There simply isn’t a playbook for accountants to follow whenever accounting challenges arise.
Now that six months have passed since the start of the pandemic, we have a better understanding of the primary accounting challenges teams at businesses across the countries are facing. Here are a few you should keep in mind over the next few months.
1. Revenue Recognition Accounting Challenges
Before the start of the Covid-19 pandemic, it was relatively easy to predict whether both sides of a contract would be able to meet their side of an obligation. Although businesses do, of course, occasionally fail, both sides of the agreement typically live up to their end of their deal.
Under most contracts, suppliers recognize revenue after a good or service has been delivered to a customer. This assumption, however, relies on the probability the customer will actually be able to foot the bill for the goods or services.
In order for a contract to exist, a company must conclude it’s “probable” they will collect most, if not all, of the amount to which both sides agree in the contract. If collectibility falls into question as a result of a customer’s financial deterioration and the supplier continues to sell them the goods or services despite the uncertainty, the degree to which revenue can be recognized comes into question.
In the event your company faces a situation in which one of your customers or potential customers faces financial turmoil, you are required to consider price concessions to lower the transaction cost. After doing so, you should then reassess the situation after each quarter to determine whether the likelihood of collectibility has increased or decreased.
2. Paycheck Protection Program
For many businesses, PPP loans issued in light of the pandemic proved to be a life saver. The low interest loans helped many companies get through a period of unprecedented uncertainty.
Still, the loans force accountants to answer questions they aren’t typically asked, such as whether PPP loans represent a new liability on the books or a grant from the government. This question in status is brought on by the fact PPP loans are forgivable.
How your company answers this question depends on the type of business you run. Non-profit organizations unsurprisingly differ from their for-profit counterparts. You can find additional guidance here.
In any case, you’ll want to be as transparent as possible about receiving the PPP loan in your financial statements as well as in how you classified it. You should also include the amounts of the loan you expect to pay and how much you expect to be forgiven.
3. Inventory Accounting Challenges
Economic slowdowns inevitably affect the amount of inventory companies are forced to carry. When demand is unstable, it becomes next to impossible for companies to forecast how much inventory they will need at any one time.
Companies can, however, exploit the “inventory impairment” caused by the Covid-19 pandemic in their tax returns. In order to do so, accounting teams must carefully link the losses they experienced because of excess inventory to the Covid-19 pandemic. They must also prove the losses arose from a “closed and completed transaction,” meaning the company disposed of the inventory by means such as selling it at a loss or donating it to a charity, among others.
By taking these steps, companies can reduce their tax burden by reporting a net loss resulting from the unused inventory. If you believe your company could potentially benefit from such accounting practices, read more here.
One potential solution to the myriad of challenges your accounting team likely faces is a powerful accounting system capable of getting your managers the financial insights they need at a moment’s notice.
With Sage Intacct, all of the reporting features your teammates need are at their fingertips. Regardless of whether your company is back in the office or still working from home, Sage Intacct can keep your accounting team doing what they do best.
Contact Timac Business Systems today for a free Sage Intacct product demo. It’s our goal to create a business software solution tailored to your company’s needs.