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:
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).