Investment Company Notebook

Practical insight and analysis on the accounting, audit and tax issues impacting investment companies.

COVID-19 and Financial Statement Disclosures | BBD, LLP

The Coronavirus pandemic (“COVID-19”) is causing significant financial and operating hardships across all industries. Any companies that are currently preparing GAAP financial statements, including investment companies, should consider whether or not the impact of COVID-19 represents a significant event as defined in FASB Accounting Standards Codification (“FASB ASC”) 855, Subsequent Events.

There are two types of subsequent events described in FASB ASC 855: 

  • The first type of subsequent event is one that provides additional evidence about conditions that existed as of the balance sheet date – a recognized subsequent event.
  • The second type of subsequent event provides evidence about events that did not exist as of the balance sheet date, but arose after that date – a non-recognized subsequent event.

Untitled design (9)-1Recognized subsequent events require adjustments to the amounts and disclosures in the financial statements, whereas non-recognized subsequent events do not require adjustments to the amounts in the financial statements. However, non-recognized subsequent events can be of such a nature that disclosure of the event is needed to prevent the financial statements from becoming misleading. This disclosure should include the nature of the event and an estimate of the financial statement effect of the event, or a statement that an estimate cannot be made.

We are often asked if stock market volatility meets the definition of a subsequent event.  We have not seen companies disclose stock market swings as a subsequent event.  We do often see general risk disclosures about market and other risks that would seem to cover stock market volatility.  Although we would not expect to see subsequent event disclosures specific to stock market volatility, we are recommending our clients consider the need to include disclosure of the impact of COVID-19 as a non-recognized subsequent event.  The following are two examples of disclosures of COVID-19 as a non-recognized subsequent event:

“Management is currently evaluating the recent introduction of the COVID-19 virus and its impact on the financial services industry and has concluded that while it is reasonably possible that the virus could have a negative effect on the fair value of the Company’s investments and results of operations, the specific impact is not readily determinable as of the date of these financial statements.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.”

“In early 2020, an outbreak of the novel strain of coronavirus (COVID-19) emerged globally.  As a result, there have been mandates from federal, state and local authorities resulting in an overall decline in economic activity.  The ultimate impact of COVID-19 on the financial performance of the Fund’s investments is not reasonably estimable at this time.”

As always, we at BBD are available to help should you have questions about the impacts of COVID-19, subsequent events, or financial statement disclosures in general.