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Disclosure Guidance: Topic 9 – SEC Publishes Guidance on COVID-19 Disclosure and Securities Law Obligations

The SEC’s Division of Corporation Finance published formal disclosure guidance and other views of securities law compliance for public companies with respect to COVID-19.

  • On disclosure matters, the guidance recognizes that it may be difficult to assess or predict with precision the broad effects of COVID-19 on industries or individual companies. The guidance also acknowledges that the actual impact will depend on many factors beyond a company’s control and knowledge.
  • Even though the SEC recognizes the uncertainty and difficulty in assessing the impact of COVID-19 on a company’s business, the SEC reminds companies of the existing requirements under the federal securities laws to disclose known trends and uncertainties, including the known or reasonably likely effects of and the types of risks presented by COVID-19.  As a result, disclosure of these risks and COVID-19-related effects may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements.
  • The guidance also` reminds public companies and related persons to comply with insider trading laws.
  • The SEC also addresses earnings releases and offers some limited relief with respect to the use of non-GAAP financial measures.

Assessing and Disclosing the Evolving Impact of COVID-19

The guidance encourages companies to consider a broad range of questions, when evaluating disclosures to allow investors to evaluate management’s view of the current and expected impact of COVID-19, including:

  • 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?
  • 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, such as revolving credit facilities or other 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?
  • How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S. GAAP or IFRS?
  • Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), 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?
  • 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?
  • 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?
  • Do you expect COVID-19 to materially affect the demand for your products or services?
  • 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?
  • Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
  • Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?

The guidance also notes the SEC’s view that companies are obligated to proactively revise and update disclosures as facts and circumstances change and highlights that the safe harbors for forward looking information in Section 27A of the Securities Act and Section 21E of the Exchange Act continue to be available to facilitate companies’ efforts to provide timely information to investors.

Need to Refrain from Trading Prior to Dissemination of Material Non-Public Information

According to the SEC, companies and other related persons need to consider their market activities, including the issuance or purchase of securities, in light of their obligations under the federal securities laws.  For example, where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public.

The SEC also stated when companies disclose material information related to the impacts of COVID-19, they are reminded to take the necessary steps to avoid selective disclosures by disseminating such information broadly to the public.  Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update a previous disclosure to the extent that the information becomes materially inaccurate.

Reporting Earnings and Financial Results

The SEC notes the ongoing and evolving COVID-19 impact will likely make it more difficult for companies and their auditors to complete the work required to maintain timely filings and encourages companies to proactively address financial reporting matters earlier than usual.  For example, to the extent a company or its auditors will need to consult with experts to determine how the evolving COVID-19 situation may impact its assets, including impairment of goodwill or other assets, it should consider engaging with those experts promptly so that its reporting remains as timely as possible, as well as complete and accurate.

The SEC also reminded companies of their obligations under Item 10 of Regulation S-K and Regulation G with respect to the presentation of non-GAAP financial measures, as well as the Commission’s recent guidance with respect to performance metrics disclosure.  According to the SEC, to the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it would be appropriate to highlight why management finds the 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.

The SEC understands that there may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete.  In these situations, the Division will not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.  The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges.

In addition, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures in reliance on the above position, the SEC stated it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors.  The SEC reminded companies that it does not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company.  Rather the SEC believes companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results.  If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.

Contact Steve Quinlivan, Bryan Pitko or Ashlee Germany for more information.