The U.S. Securities and Exchange Commission’s Office of the Chief Accountant (OCA) and Division of Corporation Finance (Division) have separately issued statements emphasizing the continued importance of high-quality financial disclosures in light of the COVID-19 pandemic. Although the statements, issued on June 23, 2020, do not create any new reporting obligations for reporting companies, they build on the SEC guidance that we discussed on March 26 and April 9 regarding disclosure on COVID-19 impacts.
The OCA noted that many companies have been required to make significant judgments and estimates to address a variety of accounting and financial reporting matters related to operations during the pandemic and advised that companies should ensure that significant judgments and estimates are disclosed in a manner that is understandable and useful to investors. OCA further noted that it would continue to not object to well-reasoned judgments and estimates used by reporting companies. It also stressed that, in monitoring disclosure controls and procedures (DCP) and internal control over financial reporting (ICFR), reporting companies may have to adapt to account for changes in the risk of controls operating efficiently in a telework environment and new or enhanced controls to account for novel risks. If any such change materially affects, or is reasonably likely to materially affect, ICFR, the reporting company must disclose such change in the quarterly filing in the fiscal quarter in which it occurs.
The OCA and the Division both highlighted the ability to continue as a going concern. In instances where substantial doubt about such ability exists, management should consider whether its plans alleviate such doubt, and make appropriate disclosures. Auditors also have an obligation to inquire and consider the adequacy of disclosures in conformity with generally accepted accounting principles if an auditor becomes aware of conditions giving rise to doubt a company’s ability to continue as a going concern.
The Division discussed the various adjustments that companies are making in light of COVID-19, including, among others, a transition to telework, modifications to supply chain and distribution, and undertaking finance activities that may include novel terms and structures. They noted that companies should take care to include material information pertaining to such adjustments not only in their earnings releases but also in their MD&A. Specifically with regard to financial assistance available under the Coronavirus Aid, Relief, and Economic Security Act, the Division encouraged companies to provide robust disclosure, including the impact of such financial assistance on their financial condition, liquidity and capital resources, impact of tax relief on short and long-term liquidity, and any new material accounting estimates or judgments.
The Division supplemented their previously issued guidance by encouraging companies to consider the following to ensure comprehensive disclosure:
- Material operational challenges, how operations have been altered to address such challenges and how such changes impact, or are reasonably likely to impact, the company’s financial condition and short- and long-term liquidity
- Overall liquidity position and outlook, impact of COVID-19 on sources and uses of funds and materiality of any assumptions about the magnitude and duration of COVID-19
- Access to, and use of, revolving lines of credit or capital in the public or private markets
- Access to, and use of, traditional funding sources on the same or reasonably similar terms as were available in recent periods, and the need for additional collateral, guarantees or equity to obtain funding
- Any material risk of not meeting covenants in credit and other agreements
- Clearly defined metrics and explanations of underlying assumptions and how management uses the metric in managing or monitoring liquidity
- Any significant modifications to capital expenditures, share repurchase programs, dividend payments, material business operations, human capital resource expenditures, and, if so, the expected duration of such measures
- Ability to timely service debt and other obligations and whether or not the company has taken advantage of available payment deferrals, forbearance periods or other concessions, and any expected liquidity challenges once those accommodations end
- Any altered terms with customers, such as extended payment terms or refund periods, and, if so, the effect of such alterations on financial condition or liquidity
- Reliance on supplier finance programs—otherwise referred to as supply chain financing, structured trade payables, reverse factoring or vendor financing—to manage cash flow
- The impact that material events that occurred after the end of the reporting period, but before the financial statements were issued, have had or are reasonably likely to have on the company’s liquidity and capital resources, and consideration of whether disclosure of subsequent events in the financial statements and known trends or uncertainties in MD&A is required
The OCA noted that they are available for consultation for complex and emerging issues as they have continued to actively engage with standard setters and other regulators, including the Financial Accounting Standards Board (FASB), Public Company Accounting Oversight Board (PCAOB) and International Accounting Standards Board (IASB).