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Subsequent events and corona virus

On Wednesday, the SEC said that it had asked accounting firms to keep an eye on the impact of the corona virus on audit quality, since it had caused personnel disruptions in China and Hong Kong. SEC Chairman Jay Clayton said in a joint statement with the PCAOB chairman: “How issuers plan and respond to events as they unfold can be material to an investment decision, and we urge issuers to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable.”

Because most US-listed Chinese companies have a calendar year end and because the impact of the virus is mostly in 2020, the important accounting question is what should be recorded or reported in the 2019 financial statements that will be released sometime in 2020.   

I believe the most important accounting guidance is found in reporting of subsequent events. There are two types of subsequent events. 

The first type consists of those events that provide additional evidence with respect to conditions that existed at the date of the balance sheet and affect the estimates inherent in the process of preparing financial statements.  Type 1 events require the year-end financial statements to be adjusted to report the impact of the events, even when they partially occur after year end. 

Accounting and the Corona Virus

The corona virus is certainly altering my life. I am in California between semesters but have been told not to return to school until further notice. My return flight was cancelled by the airline so it may have been difficult to return anyway.  The crisis is likely to create a lot of accounting woes for Chinese companies. It already seems to be having a negative effect on markets.

It is Chinese New Year holiday time, so most companies staff took last week off and most have been ordered to take off this week. Some companies, including most of the Big Four, have told staff to work from home this coming week. 

Annual reports for public companies are normally due early in the year. The US Securities and Exchange Commission requires Form 20F to be filed for calendar year companies by April 30. The Hong Kong Stock Exchange due date for these companies is March 31. The Shanghai Stock Exchange has already extended the due date to April 30.

In a normal year, the preparation of accounts by companies and audit by independent accountants follows a furious pace once people return from the New Year holiday. Since most companies are delaying the return of employees this year it may prove difficult to get annual reports out on time this year.  

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