Disclosing COVID-19-Related Risks
Efforts to contain the spread of the novel coronavirus (COVID-19) have led to suspension of many economic activities, putting unprecedented strain on businesses. On March 25, the Securities and Exchange Commission (SEC) issued guidance about disclosure obligations related to COVID-19. This article highlights factors for companies to consider when assessing these risks.
Be transparent and timely
The SEC’s Division of Corporation Finance (CF) issued Coronavirus (COVID-19), CF Disclosure Guidance: Topic No. 9 to provide best practices in disclosing the effects and risks associated with the COVID-19 pandemic. The guidance acknowledges that it may be difficult to assess or predict exactly what the broad effects of COVID-19 on industries or individual companies will be. Moreover, the impact will depend on factors beyond a company’s control and knowledge. However, “timely, robust, and complete information is essential to functioning markets.”
The SEC encourages companies to file periodic and current reports in a timely manner, notwithstanding the relief the SEC has provided for certain reports. Specifically, in March, the SEC granted a 45-day extension for certain disclosure reports that would otherwise have been due between March 1, 2020, and July 1, 2020.
Let materiality guide disclosures
It’s vital for investors, lenders and other stakeholders to understand the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events and how management is planning for COVID-19-related uncertainties. Companies should make disclosures using a principles-based system rooted in the concept of “materiality.” Put simply, companies should disclose information that a reasonable person would find important in deciding whether to sell or buy a particular company’s stock.
Disclosure of these risks and COVID-19-related effects may be necessary or appropriate in various sections of a company’s financial statements, including in:
- Management’s discussion and analysis,
- The business section,
- Risk factors,
- Legal proceedings,
- Disclosure controls and procedures,
- Internal control over financial reporting (ICFR), and
- The income statement, balance sheet and statement of cash flows.
The guidance offers various questions for companies to consider when making COVID-19-related disclosures. For example, it asks:
- How has COVID-19 impacted the company’s financial condition and results?
- With the overall economic outlook, how does the company expect the outbreak to impact its future operating results, as well as its near- and long-term financial condition?
- Does the company expect that COVID-19 will affect future operations differently than how it affected the current period?
- How does the company expect COVID-19 to affect assets on its balance sheet and its ability to account for those assets in a timely manner?
- Will telework arrangements adversely affect the company’s operations, including their financial reporting systems, ICFR, and disclosure controls and procedures?
In terms of the financial reporting framework that multinational or foreign companies use, such companies are encouraged to consider whether there will be significant changes in judgments in determining the fair value of assets measured in U.S. Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).
“The … list is illustrative but not exhaustive and each company will need to carefully assess COVID-19’s impact and related material disclosure obligations,” the guidance notes. It encourages disclosure that is “tailored” and provides material information about the impact of COVID-19 to investors and market participants.
COVID-19-related disclosures will likely involve forward-looking information that may be based on a lot of assumptions and expectations about what may or may not happen in the future. The guidance reminds companies that they may be protected by the safe harbors in securities laws if they provide forward-looking information to help keep investors informed about material developments, including known trends or uncertainties regarding COVID-19.
However, the guidance warns companies to refrain from trading before disseminating important information to the public, so they don’t violate securities law provisions on insider trading, stock trading plans of executives or fair disclosures. Companies also must consider whether to revisit, refresh or update previous disclosures to the extent that the information has become materially inaccurate.
In addition, the guidance offers advice on the use of non-GAAP measures, which most companies use voluntarily to provide insight into their operations. It says, “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.” However, the guidance warns against using non-GAAP measures for the sole purpose of presenting a more favorable view of the company.
It’s difficult to predict exactly how the COVID-19 pandemic will affect your company. But stakeholders need timely, relevant information to guide their business decisions. An experienced CPA can help your company make forward-looking estimates and reliable COVID-19 disclosures in these unprecedented conditions.