SEC Releases COVID-19 Disclosure Guidance for Public Companies
In a press release dated March 25, 2020, the United States Securities and Exchange Commission (the “Commission”) Chairman Jay Clayton encouraged “public companies to provide current and forward-looking information to their investors . . .” while continuing to prioritize health and safety during the ongoing global pandemic. In conjunction with this statement, the Commission’s Division of Corporation Finance (the “Division”) released CF Disclosure Guidance: Topic No. 9 (the “Guidance”), which provides the Commission’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions.
Noting the inherent difficulty of assessing or predicting the effects of COVID-19 on industries or companies and that the actual impact will depend on many factors beyond companies’ knowledge and control, the Division stressed that it will continue monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations. Further, the Division noted that in addition to the effects and risks of COVID-19, management’s expectations as to its future impact and how management is responding to evolving events and planning for COVID-19-related uncertainties can be material. The need for COVID-19-related disclosures may arise within the context of the federal securities laws or the principles-based disclosure system and, accordingly, disclosure may be necessary or appropriate in any of the following: management discussion and analysis, business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and financial statements.
The Division addressed three overarching concepts in the Guidance:
1. Assessing and Disclosing the Evolving Impact of COVID-19
Assessing the evolving effects of COVID-19 and related risks is a facts and circumstances analysis. Therefore, any disclosure should be tailored and specific to the company’s situation, including the company’s response to COVID-19, and presented in a manner whereby investors can perceive the company’s situation “through the eyes of management.” Though not exhaustive, the Division provided a useful list of questions to consider in assessing COVID-19-related effects, including:
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How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
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How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Do you expect to disclose or incur any material COVID-19-related contingencies?
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How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?
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Do you anticipate any material impairments, increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
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Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting? What challenges do you anticipate in your ability to maintain these systems and controls?
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Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
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Do you expect COVID-19 to materially affect the demand for your products or services?
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Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
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Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
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Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?
Whenever forward-looking information based on assumptions and expectations regarding future events is disclosed, it is important for companies to avail themselves of the safe harbors in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
2. Need To Refrain from Trading Prior to Dissemination of Material Non-Public Information
As always, and especially as it relates to material non-public information, companies must be vigilant with regard to their market activities, including the issuance or purchase of securities. In instances where the effects of COVID-19 are material to a company or a company becomes aware of material risks related to COVID-19, the company and its corporate insiders who are aware must refrain from trading activity until the information is disseminated to the public. When disseminating such information, companies must be wary of selective disclosure and ensure information is released broadly to the public. This may even involve revisiting, refreshing or updating previous disclosure to the extent that it has become materially inaccurate.
3. Reporting Earnings and Financial Results
Some companies may find financial measures outside of the generally accepted accounting principles useful to present the impact of COVID-19; in doing so, a company should include discussion on why management finds the provided measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.
If a GAAP financial measure is not available for use in the company’s earnings release due to COVID-19-related adjustments, the Division stated that it would not object to reconciling a non-GAAP financial measure to preliminary GAAP results that include either provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results. However, companies should explain why the line item(s) or accounting is incomplete, and which additional information or analysis is needed to complete the accounting.
In the context of financial reporting, including the release of earnings estimates and other financial results in advance of their periodic reports, the impact of COVID-19 will present novel and complex accounting issues and unexpected nonrecurring charges and expenses, each of which will be difficult to resolve. Accordingly, companies should work with their auditors and any necessary third-party experts proactively in an effort to maintain timely, complete and accurate filings and to address financial reporting matters earlier than usual.
As always, such non-GAAP financial measures should not be disclosed more prominently than the most directly comparable GAAP financial measures or range of GAAP measures. Moreover, the use of provisional amounts or a range of estimated results does not extend to filings where GAAP financial statements are required, such as filings on Form 10-K or 10-Q, and companies should limit the measures in their presentation to those non-GAAP financial measures that they are using to report financial results to their board of directors.