On June 23, 2020, the Securities and Exchange Commission’s (SEC) Division of Corporate Finance (CorpFin) issued CF Disclosure Guidance Topic No. 9A, which supplements its earlier COVID-19-related guidance to provide additional views on operations, liquidity and capital resources disclosures that companies should consider with respect to business and market disruptions related to the pandemic.

CorpFin reiterated that it generally encourages companies to provide disclosures that enable investors to evaluate the current and expected impact of COVID-19 “through the eyes of management” (i.e., to understand how management and the board are analyzing these effects and risks) and to “proactively revise and update disclosures as facts and circumstances change.”

The staff understands that companies have been responding to the effects of COVID-19 by undertaking a diverse and sometimes complex range of (i) operational adjustments (e.g., remote work transitions, supply chain disruptions, and health and safety modifications) and (ii) financing activities involving funding sources that may contain novel terms and structures (e.g., credit facilities, public and private markets, supplier finance programs, and new or modified customer payment terms). The guidance stresses that companies should provide “robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment, particularly to the extent efforts present new risks or uncertainties to their businesses.” While the staff notes that it has seen some of these disclosures in earnings releases, it encourages companies to consider whether an issue may be material enough to also be included in management discussion and analysis (MDA).

This supplement again provides a non-exhaustive list of questions for companies to consider as they evaluate their disclosure obligations in light of their specific facts and circumstances. These considerations include:

• Operations: Consider which operational challenges and alterations are being monitored and evaluated by management and the board, and the extent to which these may impact the company’s financial condition and short- and long-term liquidity.
• Liquidity: To the extent COVID-19 is adversely impacting revenues, consider whether such impacts are material to the company’s sources and uses of funds, and the materiality of any of the assumptions that the company has made regarding the magnitude and duration of such impacts.
• Financing Arrangements: To the extent a company has accessed revolving lines of credit or raised capital to address liquidity needs, consider whether its disclosures provide investors with a complete discussion of the company’s financial condition and liquidity. Also consider whether COVID-19 has impacted the company’s ability to access its traditional funding sources, and if so, whether the uncertainty of additional funding may impact the company’s liquidity and ability to maintain current operations.
• Risk of Default: Consider whether the company can timely service its debt and other obligations and meet covenants under credit and other agreements. Also consider whether the company has taken advantage of any available concessions, such as payment deferrals or forbearance periods and, if so, the terms of those accommodations and the liquidity challenges the company may face after they end.
• Financial Metrics: To the extent disclosures include cash burn rate or other financial metrics, consider whether they include a clear definition of that metric (including any underlying estimates or assumptions) and an explanation of how management uses that metric to monitor liquidity.
• Capital Expenditure Reductions: To the extent a company has reduced or suspended capital expenditures, share repurchase programs, dividend payments, certain operations or lines of business, as applicable, or reduced or increased human capital resource expenditures, consider whether these measures are temporary and, if so, how long the company expects to maintain them and what factors will be relevant in determining whether to extend or curtail them. Also consider the short- and long-term impact these measures may have on the company’s ability to generate revenues and meet financial obligations.
• Contractual Obligations: To the extent a company has altered contractual terms with customers, suppliers, landlords or other parties, consider how these revised terms may impact the company’s financial condition, liquidity and capital resources.
• Cash Flow Management: To the extent a company is relying on supplier finance programs (i.e., supply chain financing), structured trade payables, reverse factoring or vendor financing to manage its cash flow, consider the terms of these arrangements (including any guarantees, risks of termination and amounts payable at the end of the period) and the extent to which these arrangements impact the company’s financial statements.
• Subsequent Events: To the extent any material events have occurred after the end of the reporting period but before financial statements were issued, consider whether disclosure of subsequent events in the financial statements and known trends or uncertainties in MD&A is required.
• CARES Act: To the extent a company has received federal assistance through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), consider whether to provide disclosure regarding the impact of the loan or tax relief on the company’s financial condition, liquidity and capital resources, and the material terms and conditions of the assistance and the company’s ability to comply with them.
• Ability to Continue as a Going Concern: Consider whether the MD&A disclosure should include any conditions or events that may give rise to a substantial doubt about the company’s ability to continue as a going concern (e.g., material defaults, labor challenges, work stoppages) and the company’s plans to address these challenges.

Finally, CorpFin advised that COVID-19 may materially impact other disclosures, such as disclosure controls and procedures and internal control over financial reporting. As we previously published, the SEC has indicated an aggressive enforcement approach to suspected fraud related to COVID-19 and is reportedly conducting inquiries into public companies that received funds from loans under the Small Business Association’s Paycheck Protection Program. The staff’s continued emphasis on these disclosure considerations is noteworthy and thus should be carefully considered in preparing upcoming required disclosures, as well as in assessing the need for interim updates.