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COVID-19: Significant Estimates Just Got More Significant

Cameron Hodson, CPA, is an Audit Manager specializing in technology, GAAP, and nonprofit audits. He is a member of the Emerging Industries Practice Group.


After seven months of pandemic rollercoaster, you may be asking yourself what did COVID-19 not impact? Among the things that have changed or been augmented are accounting estimates. On a year to year basis, many of these estimates can become status quo. However, in light of the economic downturn and future uncertainty, justification for significant accounting estimates will be increasingly important and face more scrutiny. In any circumstance, “accounting estimates are based on subjective as well as objective factors, and as a result, judgment is required to estimate an amount at the date of the financial statements. Management’s judgment is normally based on its knowledge and experience about past and current events and its assumptions about conditions it expects to exist and courses of action it expects to take [Public Company Accounting Oversight Board (PCAOB). Auditing Standards (AS) 2501.03].”

To show how COVID-19 may have impacted estimates, here are just a few examples.

Allowance for Bad Debt/Uncollectible Accounts Receivable

Almost every company has this estimate on the books. Based on the historical collection of accounts receivable, this estimate can be calculated based on a percentage of accounts receivable, a percentage of each aging category, individually identified, etc. As customers experience decreases in business and cash flow shortage as a result of the pandemic, companies should consider whether to increase historical percentages or other factors used.

Valuation Allowances for Deferred Tax Assets

Deferred tax assets can arise from various business activities. Whenever a deferred tax asset exists, management must determine whether the asset will actually provide benefit in the future. For example, a net operating loss (NOL) that expires soon may not be realized if company forecasts show operating losses for the near future. Additionally, deferred tax assets due to unrealized losses on marketable securities may not provide benefit if securities are expected to regain value prior to sale.

Estimated Liability for Unpaid Losses and Loss Adjustment Expenses

In the insurance world, companies estimate future claims and associated costs related to policies they insure. Litigation and claims related to bankruptcies, cybercrimes, or fraud may increase in general during a recession. However, for health insurance carriers, due to COVID restrictions and related postponement of elective procedures, there has been l drop in 2020 claims. Because most liability estimates rely on company and/or industry historical performance, models may need to be adjusted to factor in the above scenarios depending on coverages offered.


Other estimates that may be impacted by COVID-19 and the related economic downturn include:


  1. Allowance for credit losses
  2. Estimates used in accounting for leases:
    • Fair value of the underlying asset
  3. Fair value of investments in debt and equity securities
  4. Fair value of derivative instruments
  5. Carrying amount of investments accounted for by the:
    • Equity method (for example, losses in excess of investment)
    • Cost method (for example, impairments that are other than temporary)
  6. Valuation allowance for deferred tax assets


  1. Loss contingencies:
    • Guarantees of debt
    • Litigation
  2. Product warranty liabilities
  3. Estimated real and personal property taxes
  4. Liability for unrecognized tax benefits
  5. Imputed rates to discount:
    • Notes payable
    • Environmental liabilities
  6. Defined benefit pension plans (actuarial assumptions)
  7. Postemployment benefits such as salary continuation or severance benefits
  8. Postretirement benefits other than pensions
  9. Accrued compensation arising from share-based awards
  10. Discontinued operations (such as estimated loss to be incurred and proceeds from sale of assets)

Revenues and Expenses

  1. Estimates used in recognizing revenue in accordance with FASB ASC 606, Revenue from Contracts with Customers:
    • Determining the transaction price (discounts?)
    • Allocating the transaction price to performance obligations
    • Amount of variable consideration
    • Amount of product returns
  2. Losses on contracts with customers (pre-FASB ASC 606 )
  3. Revenue with right of return (pre-FASB ASC 606 )
  4. Long-term contracts (pre-FASB ASC 606 ):
    • Revenue to be earned
    • Cost to complete
    • Percent of completion
  5. Losses on purchase commitments


  1. Gain contingencies
  2. Fair value of financial assets and liabilities under the fair value option

For more information on accounting estimates, contact your Larson advisor today.