The Chairman of the U.S. Securities and Exchange Commission (the “SEC”) and members of the SEC Staff have recently made statements concerning upcoming disclosures that public companies will be making about the impact of the COVID-19 pandemic. These statements emphasize the importance of high-quality financial reporting and a focus on meaningful forward-looking disclosures during the COVID-19 pandemic.
Statement of the SEC’s Chief Accountant
On April 3, 2020, Sagar Teotia, the Chief Accountant of the SEC, issued a statement noting that the SEC’s Office of the Chief Accountant, along with the Commission and other Divisions and Offices of the SEC, is closely monitoring the impact of issues raised by COVID-19 on investors and global capital markets.[1] The Chief Accountant notes that, during these challenging times, “investors and other stakeholders need high-quality financial information more than ever.” He notes that “to further high-quality financial information, we are available to help companies, auditors, and others with complex accounting, financial reporting, independence, and auditing issues. We are taking a proactive approach and have been engaged with stakeholders across the financial reporting ecosystem – e.g., preparers, auditors, audit committee members, investors, standard setters, and other regulators – on issues related to current market developments. We remain available for consultation and encourage stakeholders to contact our office with questions they encounter as a result of COVID-19.”
According to the statement, the Office of Chief Accountant is actively engaged with the Financial Accounting Standards Board (“FASB”) in support of FASB’s efforts to address the impacts of COVID-19. Further, the statement notes that the Office of Chief Accountant has consistently not objected to well-reasoned judgments that entities have made when making significant judgments and estimates, and they will continue to apply this perspective. The statement indicates that some of the accounting areas that may involve significant judgments and estimates in light of the evolving status of COVID-19 include: (i) fair value and impairment considerations; (ii) leases; (iii) debt modifications or restructurings; (iv) hedging; (v) revenue recognition; (vi) income taxes; (vii) going concern; (viii) subsequent events; and (ix) adoption of new accounting standards (e.g., the new credit losses standard). The Office of Chief Accountant stresses the importance of required disclosures of judgments and estimates in these and other areas.
The Office of Chief Accountant is working with market participants regarding the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act, which was signed into law on March 27, 2020, allows a limited number of entities the option to temporarily defer or suspend the application of two provisions of U.S. GAAP.[2] The statement notes that, for those entities that are eligible for and elect to apply this deferred application under either Section 4013 or Section 4014 of the CARES Act, the Staff would not object to the conclusion that this application is in accordance with GAAP for the periods for which such elections are available.
The Office of Chief Accountant has also been actively engaged and working collaboratively and constructively with the Public Company Accounting Oversight Board (the “PCAOB”) to address emerging issues relating to COVID-19. The Office of Chief Accountant also remains actively focused on independence matters, and the statement notes that “[m]anagement and audit committees should be aware of how an auditor independence violation may affect the company’s required SEC filings.”
The Office of Chief Accountant is also engaged in the activities of a number of international organizations and securities regulators, both as part of the Office’s normal operations and specifically relating to the impact of COVID-19, including discussions with the International Accounting Standards Board on the impact of COVID-19 and through the SEC’s leadership role in the Monitoring Group, a global organization composed of regulators and others dedicated to serving the public interest in areas related to international audit standard setting and audit quality.
The Office of Chief Accountant continues to engage with stakeholders both domestically and internationally, including recent engagement with representatives from the four largest global accounting firms to discuss each of the firms’ efforts to advance audit quality in emerging markets, including China, the largest emerging market economy.
The statement concludes that the “financial reporting structure is strong, thanks to the collective work of all participants in fulfilling each of our unique roles with integrity and transparency.” The Office of Chief Accountant “urges all participants in the financial reporting system to continue to work together to provide investors with the high-quality financial information they need to make decisions amidst uncertainty.”
Statement of Chairman Jay Clayton and Director of the Division of Corporation Finance William Hinman
On April 8, 2020, Chairman Jay Clayton and Director of the Division of Corporation Finance William Hinman released a statement calling on public companies to provide forward-looking information in upcoming earnings releases and investor calls in light of the wide-ranging impacts from the COVID-19 pandemic and the efforts taken to mitigate the spread of the disease.[3]
In the statement, Clayton and Hinman urge public companies “to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning.”
The statement notes that “the collective national effort to mitigate the COVID-19 pandemic has caused a deep contraction in vast areas of our economy, with many workers and businesses facing profound challenges.” Further, the statement indicates that, while there is broad support for a mitigation response to COVID-19, there is “broad recognition that our strategy must evolve to effectively address the health risks of COVID-19 while fostering a meaningful, responsible increase in economic activity” and the “executing such a strategy will require constant coordination among workers, consumers, businesses, governmental authorities and investors, both broadly and at the individual and firm-specific level.” Further, Clayton and Hinman indicate that “[t]here now appears to be an emerging consensus that, as we develop more tools to fight COVID-19—increased testing, enhanced monitoring, data analysis, and identification of effective therapeutics—we can, anchored by advice of healthcare specialists, incrementally foster economic activity.”
Clayton and Hinman indicate that public company disclosures “should reflect this state of affairs and outlook” and should address “investor interest” in:
- where the company stands today, operationally and financially;
- how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing; and
- how the company’s operations and financial condition may change as all our efforts to fight COVID-19 progress, with historical information relatively less significant for this purpose.
Clayton and Hinman acknowledge that “providing detailed information regarding future operating conditions and resource needs is challenging, including because our response strategies are in their incipient stages (and are likely to change), but it is important on many levels” but indicate that “updating and refining these estimates should become less difficult over time.”
They further state their view that “[h]igh quality disclosure will not only provide benefits to investors and companies, it also will enhance valuable communication and coordination across our economy—including between the public and private sectors—as together we pursue the fight against COVID-19” and that “[t]his transparency can foster confidence in countless specific instances, for example, between a supplier and a manufacturer as well as between an investor and a company, which in combination will benefit all.”
Clayton and Hinman encourage public companies that respond to this call for forward-looking disclosure “to avail themselves of the safe-harbors for such statements and also note that we would not expect good faith attempts to provide appropriately framed forward-looking information to be second guessed by the SEC.” In this regard, they state further that “[g]iven the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information.”
Clayton and Hinman indicate that “[t]his quarter, earnings statements and calls will not be routine. In many cases, historical information may be substantially less relevant. Investors and analysts are thirsting to know where companies stand today and, importantly, how they have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis.” They note that the SEC staff “has encouraged earnings and related disclosures that are as timely, accurate and robust as practicable under the circumstances.” They also urge public companies, in their earnings releases and analyst calls, as well as in subsequent communications to the marketplace, “to provide as much information as is practicable regarding their current operating status and their future operating plans under various COVID-19-related mitigation conditions.” This could include disclosure concerning:
- current liquidity positions and expected financial resource needs;
- the impact of COVID-19 on operations, including “as a result of company efforts to protect worker health and well-being and customer safety;” and
- the impact of financial assistance under the CARES Act or other similar COVID-19 related federal and state programs.
Clayton and Hinman discourage public companies from resorting to “generic, or boilerplate, disclosures that do little to inform investors of company-specific status, operational strategies and risks.” Instead, they encourage companies and their advisers “to make all reasonable efforts to convey meaningful information—information that provides investors a level of insight that allows them to see the key operational and financial considerations and challenges the company faces through the eyes of management.”
Clayton and Hinman express the view that “robust, forward-looking disclosures will benefit investors, companies and, more generally, our fight against COVID-19,” indicating that “such disclosures will facilitate communication and coordination among the public and private sectors.”
[1] Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 (April 3, 2020), available at: https://www.sec.gov/news/public-statement/statement-teotia-financial-reporting-covid-19-2020-04-03.
[2] Section 4014 of the CARES Act provides that no insured depository institution, bank holding company, or any affiliate thereof shall be required to comply with FASB Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“CECL”) during the period beginning on March 27, 2020, until the earlier of (1) the date on which the national emergency concerning the COVID-19 outbreak declared by the President on March 13, 2020, under the National Emergencies Act (50 U.S.C. 1601 et seq.) terminates; or (2) December 31, 2020. Section 4013 of the CARES Act provides that a financial institution may elect to suspend troubled debt restructuring (“TDR”) accounting under GAAP (see FASB Accounting Standards Codification Subtopic 310-40, Receivables-Troubled Debt Restructurings by Creditors) in certain circumstances, during the period beginning March 1, 2020, and ending on the earlier of December 31, 2020, or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President on March 13, 2020, under the National Emergencies Act terminates.
[3] The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19 (April 8, 2020), available at: https://www.sec.gov/news/public-statement/statement-clayton-hinman.
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