As Second Quarter Closes, SEC Issues Further COVID-19 Disclosure Guidance

COVID-19 Update

Introduction

On June 23, 2020, in CF Disclosure Guidance: Topic No. 9A, the SEC’s Division of Corporation Finance issued a supplement to the Division’s initial COVID-19-related disclosure guidance from March 25. The Division’s supplemental guidance details suggestions for public companies’ disclosures as the second fiscal quarter comes to a close and related earnings are released. Specifically, the guidance focuses on the effects of the COVID-19 pandemic on public companies’ current and future operations.

The Division reiterated prior views of the Staff, which have repeatedly stressed that disclosures such as these should enable investors to judge COVID-19’s current and anticipated effects “through the eyes of management.” This is consistent with prior releases such as that in 2003 where the Staff published interpretive guidance on information that should be part and parcel of Management’s Discussion and Analysis of Financial Condition and Results of Operations:

“The purpose of MD&A … is to provide readers information necessary to an understanding of [a company’s] financial condition, changes in financial condition and results of operations.” The MD&A requirements are intended to satisfy three principal objectives:

  • To provide a narrative explanation of a company’s financial statements that enables investors to see the company through the eyes of management
  • To enhance the overall financial disclosure and provide the context within which financial information should be analyzed
  • To provide information about the quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance

Quite obviously, the COVID-19 pandemic has profoundly affected companies’ liquidity, capital resources and day-to-day operations. In light of this, the Staff’s current interpretive guidance on the effects of COVID-19 is meant to remind issuers of the continued need to be descriptive of the effects of the pandemic not only on current results but also on “future performance.”

What Are Public Companies Advised to Do?

The Division asks a reporting issuer to describe material effects on corporate operations, of any required “COVID-19-related adjustments,” including transitions to remote working, supply chain and distribution modifications, and alterations of operations to comply with health and safety protocols. Additionally, the Division identifies considerations companies should employ in determining their disclosure obligations, including material operational challenges, evolving overall liquidity position and outlook, access to funding sources and terms, liquidity metrics, reduction in capital expenditures, and timeliness of debt service. Specifically, companies accessing the public and private markets, negotiating customer payment terms, and implementing supplier finance programs should disclose the effect of the pandemic on these activities.

The Division’s guidance further suggests that companies benefiting from federal COVID-19-related assistance, such as the CARES Act and tax relief, need to disclose the terms and conditions of such assistance and should consider the impacts of the assistance on their current and projected financial condition, liquidity and other capital-related concerns.

Lastly, as a nod to prior Staff guidance, the Division again encourages and reminds companies of their reporting obligation to weave material current and forward-looking information related to COVID-19 into MD&A. As mentioned above, the Division desires that companies “proactively revise and update disclosures as facts and circumstances change.”1

On the same day the Division released its additional guidance, SEC Chief Accountant Sagar Teotia issued a “Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19.”2 The statement mainly details the Office of the Chief Accountant’s engagement with stakeholders throughout the financial reporting system, but also underscores the crucial need for diligent auditing and internal controls, as well as accurate and thorough financial reporting by companies.

Implications and Conclusion

This recent guidance from the SEC’s Division of Corporation Finance both demonstrates the need for significant and detailed disclosure with respect to the COVID-19 pandemic and continues to emphasize the importance of disclosure that is both current and forward looking and “that enables investors to see the company through the eyes of management.” This means that public companies should be more transparent and accommodating than ever to inform investors of material changes in their financial condition and operations, both in general and with respect to COVID-19 specifically, taking into account the comprehensiveness, germaneness and timeliness of their disclosures right now and looking ahead.

1 CF Disclosure Guidance: Topic No. 9A.

2 Accountant Statement (June 23, 2020).

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