CFOs are using a number of ways to report pandemic-related impacts, putting the onus on analysts, investors, regulators and others to decipher company performance, Moody's Investor Services said in a March 8 sector comment.
Generally accepted accounting principles (GAAP), for example, don't include guidance on accounting for government assistance, which many companies took advantage of last year.
The lack of standardization means companies receiving grants, expense reimbursements or loans are showing the assistance in their 2020 filings in different ways.
Delta Air Lines, for example, received a below-market interest rate loan and a grant to help it offset pandemic-related expenses. It recorded the loan at market rate with a discount and it recorded the grant in cash and cash equivalents and then netted the grant in the income statement against pandemic-related expenses.
Delta's approach is generally representative of how companies are reporting their assistance. "We have found that reporting is keeping with our analytic view [rather than requiring adjustments for one-offs], such as offsetting expenses or gain recognition in non-operating income," the report said.
But not all companies are taking this approach. "This means we can see varying practices," it said.
Companies' methods for making pandemic-related adjustments to non-GAAP measures, such as earnings before interest, taxes, depreciation and amortization (EBITDA), also varies.
Moody's has singled out as debatable an approach some companies are taking, called adjusted EBITDAC — EBITDA plus Covid.
Without standardization, adjusted EBITDAC means different things to different companies, creating challenges for anyone trying to understand a company's underlying performance.
"Metrics that use estimations to give credit for lost revenue would create a make-believe result," the report said.
Companies using the procedure to cut a pandemic-specific cost from EBITDA should include a corresponding pandemic-related gain, Moody's said. That's an approach the Securities and Exchange Commission wants companies to take, too.
"The SEC has advised that if a company reports adjusted non-GAAP measures that include an add-back for one-time pandemic related expenses, those same measures need to also consider one-time pandemic related gains," the report said.
Companies should also consider whether the procedure even makes sense at this point, since the year-plus duration of the crisis makes it hard to justify.
"What originally started as one-time type expenses are turning into recurring expenses," the report said.
Working capital financing
The way companies are reporting factoring arrangements is another gray area.
Many companies have made arrangements to sell their accounts receivable to help boost working capital while income is down from the pandemic. Since there's no standardization on how to report these arrangements, analysts and others can be left in the dark if the financing should stop, which can happen for any number of reasons, especially if the company is in trouble.
"As lower rated companies ... lean heavily on these facilities to finance their working capital and other financial needs [they] tend to have more limited liquidity," the report said. "This makes them subject to more severe consequences if these funding sources run dry."
Moody's recommends companies report these arrangements as debt, since the liability they face if the funding dries up is essentially debt lability.
"These transactions are rarely reported as debt and generally are presented as a short-term liability or included in trade payables on the balance sheet," Moody's said, adding that, in the cash flow statement, they're listed as an operating activity.
At the least, companies should discuss the liability in the management discussion and analysis (MD&A) section of the 10-K.
Going concern delays
One of the reasons companies are delaying their filing is to work out going concern issues, the report said.
Once the company's external auditor raises a going concern issue in the auditor's opinion section of the financials, that can affect the company's ability to meet its obligations in its debt covenants. That's because debt covenants typically base benchmark performance on financials being delivered without qualification from the auditor. An auditor raising a going concern issue can trigger a default against the clean-audit requirement, putting the company in a difficult position.
It can often be better for the company to delay issuing its financial statements to either work out a waiver of the covenant requirement or execute a refinancing.
While that might be better for the company, it nevertheless can be seen as a red flag about its ability to stay in business for another year or so.
"Investors should suspect going concern issues for companies that delay issuance of their financial statements," Moody's said.