Disclosure Guidelines for Public Companies Affected by COVID-19
On March 25, 2020, the U.S. Securities and Exchange Commission’s Division of Corporation Finance provided guidance regarding disclosure and other securities law obligations that public companies should consider in light of the COVID-19 pandemic. The SEC also extended its previously announced filing deadline relief.
Assessing and Disclosing the Evolving Impact of COVID-19
In its guidance, the corporation finance division stressed that assessing the evolving effects of COVID-19 and related risks will be a facts-and-circumstances analysis specific to each company. As companies assess COVID-19-related effects and consider their disclosure obligations, key items to consider include:
- The impact on the company’s current financial condition and results of operations, future operating results and near-and-long-term financial condition
- The impact on the company’s capital and financial resources, overall liquidity position and outlook, including:
- Cost of or access to capital and funding sources, and sources or uses of cash otherwise
- Ongoing ability to meet the covenants of credit agreements
- The course of action taken or proposed to be taken to remedy any material liquidity deficiency
- Ability to service its debt or other financial obligations and access the debt markets
- Incurrence of any material COVID-19-related contingencies
- The effect on assets on the company’s balance sheet and its ability to timely account for those assets
- 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 the company’s financial statements
- Circumstances such as remote work arrangements and their effect on the company’s ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures
- Challenges in implementing the company’s business continuity plans or material expenditures that would be required to do so
- Demand for the company’s products or services
- Effects on the company’s supply chain or the methods used to distribute the company’s products or services, including the relationship between costs and revenues
- Human capital resources and productivity
- Travel restrictions and border closures
Need to Refrain from Trading Prior to Dissemination of Material Non-Public Information
The corporation finance division also stressed the need to refrain from trading prior to dissemination of material non-public information, and in doing so echoed the statements made by the co-directors of the SEC’s Division of Enforcement on March 23, 2020, in which they emphasized the need to maintain market integrity by insiders. The co-directors of the enforcement division further noted that substantial resources are being committed to prevent fraud and illegal practices.
Reporting Earnings and Financial Results
The corporation finance division provided guidance on the impact of COVID-19 on a company’s disclosure of earnings estimates and other financial results, specifically noting the following:
- The need to proactively address financial reporting matters, such as impairment of goodwill or other assets, earlier than usual.
- To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, the company should 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.
- In the event a GAAP financial measure is not available due to COVID-19-related adjustments that would require additional information and analysis to complete, the Division of Corporation Finance would not object to reconciliation of the 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. However, this accommodation will not be available for filings where GAAP financial statements are required, such as filings on Form 10-K or 10-Q.
- 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, 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.
- Lastly, 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.
Extension of Filing Deadlines
The SEC previously issued an order on March 4, 2020, providing relief for companies affected by the COVID-19 coronavirus outbreak. On March 25, 2020, the SEC issued an order extending the filing periods covered by its previous order. The extension now provides a 45-day extension for filings that would have been due on or by July 1, as compared to the SEC’s previous order, which provided relief for filings that would have otherwise been due between March 1 and April 30.
The order applies to the same type of filings as the previous order—including annual reports on Form 10-K, quarterly reports on Form 10-Q and proxy statements. Moreover, an issuer taking advantage of this relief must satisfy the conditions outlined in the previous order, the most important of which is that the issuer must be unable to meet a filing deadline due to circumstances related to COVID-19. The other conditions are outlined here.