Forecasting and impairment tips for an unprecedented time

By Joseph Radigan

The economic downturn caused by the COVID-19 pandemic is hardly the first recession many financial professionals have had to endure.

But no downturn from recent decades matched its suddenness. The unprecedented level of uncertainty about when the recession will ease and what the hoped-for recovery will look like poses a challenge for accounting professionals when reviewing clients’ estimates and asset valuations.

“There’s no playbook for this one, which makes things so much more difficult,” said Anthony Alfonso, a principal with BDO USA LLP, during a session at the AICPA Conference on Current SEC and PCAOB Developments.

The pandemic’s damage has varied among industries. Commercial real estate, transportation, and hospitality have been hit hard. Alfonso said commercial property landlords can’t predict how much space major corporate tenants will want in 2021 and beyond, and airlines don’t know when passenger volume will return to prepandemic numbers. Other industries, particularly grocers and online retailers, appear to be prospering.

“Forecasting is difficult in normal times,” Alfonso said. “Given where we’re at, it just makes it so much more difficult.”

The pandemic’s fallout prompted many companies to review their costs from top to bottom, and the reviews are all but certain to factor into their management of costs and forecasts of financial performance. The cost assessments cover almost every area of operations, from the size and location of corporate headquarters to where specific teams are located.

Christopher Sessar, the head of corporate financial reporting and chief accounting officer for German software giant SAP, said that early in the pandemic, the company assumed there would be the so-called V-shaped economic rebound. As the economic upheaval dragged on through the spring and summer, SAP began expecting a more drawn-out recovery, and that caused it to adjust how it employs the machine-learning system it developed in recent years for making sales forecasts.

“All the thinking which went into the algorithm and into our prediction model delivered very strange results,” Sessar said, in explaining the economic unpredictability from the pandemic. “We had to learn after Q2 that you really have to make adjustments and have to retrain the machine-learning model.”

Sessar said SAP’s financial executives soon reconsidered and updated the economic data they used and then compared it to how the pandemic affected its business and the broader economy.

“If we find changes, for instance, in sales behavior, and if we find patterns which are unique to new external circumstances, then we basically start retraining our machine-learning application and pick up those patterns in order to account for COVID-19-triggered effects,” Sessar said.

Leslie Seidman, who chaired FASB from 2010 to 2013 and is now a board member for General Electric Co. and Moody’s Corp., said directors play an important role in giving management assumptions a reality check. For starters, board members’ outside experience can offer management a new perspective about the challenges of navigating the pandemic.

Independent directors should be “making sure that we’re rigorously challenging the process, the assumptions — and bringing honestly an informed commonsense view to what management is putting forward as the best-case, worst-case, or most-likely-case scenarios,” Seidman said.

Sessar said that because many of the economic forecasts companies make may have some plausible reason supporting them, it’s important for management to document its reasons for arriving at its forecasts. Auditors will have to make sure that the documentation has been prepared correctly and supports management’s assumptions.

“At SAP, we always have at least three different scenarios of pessimistic, realistic, and optimistic cases; there’s always a range,” Sessar said. “It’s really important to document properly what you’re talking about.”

Company boards are also being asked to pay closer attention to asset valuation and impairment testing, which have been hard to predict in part because of the disconnect between the economy and stock market. Seidman said it’s crucial that management and auditors keep directors, particularly the audit committees, apprised of the company’s financial condition.

“This last year, there have been moments where most of us have looked at the market and wondered what just happened,” said Phillip Austin, CPA, the national assurance managing partner of auditing for BDO USA LLP in Chicago. “Every indicator was downward, and the market went upward.”

Alfonso said the stock market’s continued buoyance may be giving some public companies a reprieve from having to take impairment charges against their assets, even if their operations are suffering from the recession. Private companies may not be so lucky and be forced to take an impairment charge.

Seidman said the need for a steady flow of information among management, directors, and auditors is especially important when it comes to impairment testing.

“Make sure that your audit committee understands which standards you’re talking about, and what the different triggers are, and what the different measuremets are,” Seidman said. Different types of assets, such as long-lived assets, intangible assets, indefinite-lived intangible assets, and goodwill intangibles, are addressed by different impairment guidance, and write-downs can be triggered by different events.

Once the asset valuations hit their trigger, the measurement methods may vary. In addition, the GAAP requirements for each type of impairment may be well understood by management and directors. But given the unprecedented environment of this recession, no one from the company is likely to have had to perform an asset impairment in anything resembling the current environment, Seidman said.

“It’s about documenting the different conclusions you might reach,” Seidman said. “I would just take that extra step and make sure that you walk your audit committee through that so that we all understand that there’s some complexity here, and people can understand how you walked through these analyses,” Seidman said.

SAP’s financial reporting team began discussing impairment issues with its audit committee as soon as the risk of an economic downturn became apparent earlier this year, Sessar said. The board was given a breakdown of the risks the company was facing, the assets on the balance sheet, the triggers that would trigger an impairment for each asset class, and how the different elements were related.

“That was very important for the audit committee to really understand, how the mechanics work,” Sessar said.

Joseph Radigan is a financial writer based in New York. To comment on this article or to suggest an idea for another article, contact Ken Tysiac, the JofA’s editorial director, at

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