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The Division of Corporation Finance of the Securities and Exchange Commission (SEC) has issued CF Disclosure Guidance Topic No. 9 (Guidance), which provides guidance on the disclosure and other securities law obligations companies need to consider for COVID-19 and its related business and market disruptions. Although the Guidance has no legal force or effect, it provides timely insights into the rapidly evolving impact that COVID-19 is already having, and likely will continue to have, on many sectors, and how companies can position themselves to proactively adjust disclosure so as to address these material changes.

Disclosure Requirements

Acknowledging that the effects of COVID-19 may be difficult to accurately assess or predict, the Guidance indicates that the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding, and how it is planning for COVID-19-related uncertainties can be material to, and have a material impact on, investment and voting decisions. The SEC observes that disclosure of these matters may be required throughout company filings, including in management’s discussion and analysis, description of business, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and financial statements.

The Guidance sets forth a series of illustrative questions and situations that a company should consider to position itself to comply with its disclosure obligations:

Financial Condition and Results of Operations
  • How has COVID-19 impacted your financial condition and results of operations?
  • How do you expect COVID-19 to impact your future operating results and near-and long-term financial condition?
  • Do you expect that COVID-19 will impact future operations differently than in the current period?
Capital and Financial Resources
  • 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?
  • If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?
  • Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk.
  • Do you expect to disclose or incur any material COVID-19-related contingencies?
  • 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? What challenges do you anticipate in your ability to maintain these systems and controls?
  • 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 encourages companies to provide disclosures that are tailored and allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management. It also encourages companies to proactively revise and update disclosures as facts and circumstances change and reminds companies that forward looking information can be provided in a way to obtain the protection provided by the safe harbors in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act.

Trading and Selective Disclosure Considerations

The Guidance includes a blunt reminder that if a company experiences a COVID-19 impact or is aware of a COVID-19-related risk that is material nonpublic information, the company, its directors and officers and other corporate insiders need to refrain from trading in the company’s securities until such information is publicly disclosed. When such information is disclosed, the Guidance emphasizes the need to avoid selective disclosure, by making sure the information is disseminated broadly to the public, including compliance with Regulation FD. In addition, a company should consider whether it may need to revisit, refresh, or update previous disclosures to the extent that the information becomes materially inaccurate.

Reporting Earnings and Financial Results

The Guidance acknowledges that COVID-19 may present a number of novel or complex accounting issues that may take time to resolve, and encourages companies to proactively address financial reporting matters earlier than usual.

With respect to the presentation of non-GAAP financial measures, if 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.

Where a GAAP financial measure is not available at the time of an earnings release because the COVID-19-related adjustments require additional information and analysis, the Guidance indicates that the staff will not object if a company reconciles 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. However, a company doing so must 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. In addition, a company should limit its use of this to non-GAAP financial measures it uses to report financial results to its board of directors.

In filings where GAAP financial statements are required, such as filings on Form 10-K or 10-Q, companies will need to reconcile to GAAP results, and may not include provisional amounts or a range of estimated results.

For more cutting-edge perspectives on the legal and business implications of COVID-19, visit our COVID-19 resource center.