Key Accounting and Reporting Considerations in Times of Uncertainty

Whether driven by geopolitical tensions, pandemics, or sudden regulatory changes, economic uncertainty poses significant challenges for organizations and their finance teams. In such periods, accounting and financial reporting require heightened attention to maintain transparency in disclosures and compliance with U.S. GAAP and other regulations. 

Periods of volatility can disrupt supply chains, impact customer demand, and introduce volatility in financial markets. For accounting professionals, these disruptions translate into increased complexity in financial reporting, forecasting, and compliance.

Key drivers of uncertainty may include:

• Global economic slowdowns
• Tariff and trade policy changes
• Supply chain disruptions
• Inflation and interest rate volatility
• Regulatory changes or government interventions

Financial Statement Impact Areas

Economic uncertainty can significantly affect business activities and cause severe market disruptions. The following are just a few of the financial statement areas that may be impacted in times of economic uncertainty:

• Revenue Recognition: Uncertainty can affect the timing and amount of revenue recognized. For example, tariffs and supply chain disruptions may delay the organization’s delivery of goods or services, while changes in customer demand can lead to contract modifications or cancellations.

• Inventory Valuation, Cost of Goods Sold and Gross Margin: Tariffs, supply chain issues, and fluctuating demand can lead to excess or obsolete inventory, or changes in the cost of inventory or market prices, all of which can affect inventory valuation and margins.
• Impairment of Non-Financial Assets: Economic downturns and uncertainty can trigger impairment indicators for goodwill, intangible assets, property, plant, and equipment and other long-lived or indefinite-lived assets.
• Financial Instruments and Credit Losses: Volatility in financial markets and customer creditworthiness can affect the valuation of financial instruments and the estimation of credit losses.
• Debt Covenants and Going Concern: Uncertainty may increase the risk of covenant breaches or raise questions about an organization’s ability to continue as a going concern. For more on the evaluation of going concern, download BDO’s Guide to Going Concern Assessments.
• Hedging and Risk Management: Organizations may employ new hedging strategies to manage the effects of tariffs and currency fluctuations. Conversely, changes in the economic environment may lead to an existing instrument no longer meeting the definition of a derivative, or transactions no longer qualifying for hedge accounting.

Enhanced Disclosures and Transparency

In times of uncertainty, transparent and robust disclosures are essential for users of financial statements. Organizations are required to clearly articulate the risks, judgments, and estimates that underpin reported results and forward-looking information, and to comply with regulations for any non-GAAP measures that supplement their financial statements.

Internal Controls and Governance

Internal controls and governance processes are especially important in times of economic uncertainty. Organizations should revisit their control environment to validate that it remains effective in the face of new risks.

Economic uncertainty and external shocks can present significant challenges for accounting and financial reporting. By focusing on impact areas, enhancing disclosures, and maintaining robust internal controls, organizations can navigate turbulent times.