Attestation Update – A&A for CPAs

Technical stuff for CPAs providing attestation services

Economic damage from shutdown – 4/15.

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A few more articles on damage we are seeing from the economic shutdown.

Guess on California unemployment rate

April 2020 – Eberhardt School of Business, University of Pacific – Initial Estimates of Employment Impacts of Covid-19 Pandemic – The school of business estimates an unemployment rate of 18.8% in California for the month of May 2020.

This is in contrast to 2010 rate of 12.2% and 2019 rate of 4.0%.

Likely increase in bankruptcies

4/13/20 – Washington Examiner – Pandemic likely to exceed Great Recession in number of bankruptcies – Economists from a leftist think tank and a conservative think tank both guess that the  number of bankruptcies from the current shutdown of the economy will exceed the number from the Great Recession.

For background, here is the number of bankruptcies per year. I pulled the count of total cases filed in federal bankruptcy court from the US Courts website.

Middle column is number of bankruptcies per year in millions. I also calculated the number of BKs above a base-line, which is an estimate of the excess BKs caused by the Great Recession.

year BK excess
2006        0.62
2007        0.85
2008        1.10        0.25
2009        1.40        0.55
2010        1.60        0.75
2011        1.47        0.62
2012        1.21        0.36
2013        1.11        0.26
2014        0.94        0.09
2015        0.84
2016        0.79
2017        0.79
2018        0.77
2019        0.77
2020        0.77
total        2.88

 

The recession officially ended in June 2009. Bankruptcies accelerated in 2008 and peaked in 2010. Notice it was 2014 before the tally dropped below a million and 2016 before the count settled in at a typical level.

Ripple effects into higher education

4/10/20 – Wall Street Journal – College Students Demand Coronavirus Refunds I have been watching the college and university world for the impact of the pandemic. I perceive that industry will be a good illustration of the practical and financial reporting impacts.

Many students will probably be expecting a refund for room and board. I will guess a lot of students will eventually demand a discount on tuition. With posted rates for total cost of $50,000 or $70,000 a year, lots of students will be looking for lots of money back.

Students at two schools (Drexel University and University of Miami) have filed suit for refund of tuition. They hope to transition this into a class-action suit. Initial assertion from the attorneys for the schools is they are meeting their contract terms by offering classes remotely.

Just a few issues this raises for accountants:

  • accrual for liabilities,
  • contingent liabilities,
  • disclosures,
  • going concern.

4/9/20 – Campus Reform – Colleges nationwide are bleeding money. Some might not make it. – Article surveys announced losses by several colleges and planned refunds by several others.

Colleges were facing rising costs, declining tuition with dropping enrollment before the pandemic cleared out campuses and generated expectations of refunds.

Article says the start of classes in the fall is in question for some schools.

Other sectors

4/9/20 – Variety – AMC Theaters Bankruptcy Likely, Analysts Say – Here is the first specific mention I have seen of what I expect we’re going to see on a regular basis. Using 12/31/19 financial information, analysts calculate the company has about $597 million cash plus lines of credit available. With no revenue coming in their burn rate is about $155 million a month, which analysts say keeps AMC liquid until June or July. Company announced it will not make any lease payments in April, which analysts say gives him several more months.. Another analyst says they will have to file for bankruptcy in August when cash is estimated to be gone. It’s a wild guess when people start going back to theaters.

I mentioned this especially as a high level going concern analysis. It wouldn’t take much more information to calculate precisely when cash will run out. Add in a guess as to when people start trickling back in the theaters and harm will be until theaters are relatively full and you could then have enough info to make a professional determination on whether to add a going concern qualification.

 

Written by Jim Ulvog

April 15, 2020, 9:53 am at 9:53 am

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