On June 23, 2020, the SEC issued new guidance for companies’ disclosure considerations regarding operations, liquidity and capital resources in light of COVID-19. The guidance, which largely reiterates similar themes as the SEC’s prior guidance, encourages companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 “through the eyes of management” and to proactively revise and update disclosures as facts and circumstances change.

The guidance addresses three main disclosure topics: (1) the effects of COVID-19 on a company’s operations, liquidity and capital resources; (2) the short and long-term impact of any federal assistance received under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act); and (3) a company’s ability to continue as a going concern. In conjunction with the SEC guidance, Sagar Teotia, SEC Chief Accountant, highlighted “the importance of high-quality financial reporting in light of the significant impacts of COVID-19.”

Impact of COVID-19; Operations, Liquidity and Capital Resources Disclosures

The guidance instructs companies to carefully consider disclosing the impact of operational adjustments being made in response to COVID-19, such as teleworking, supply chain and distribution adjustments, suspension of repurchase plans and dividends and changes in response to health and safety guidelines to protect employees, contractors, and customers. In addition, the SEC notes that many companies are undertaking a diverse and often complex range of financing activities, which may include novel terms and structures. Companies are urged to provide detailed and transparent disclosures about how they are dealing with short and long-term liquidity and funding risks in the current economic environment, with particular focus on new risks or uncertainties to their businesses.

Additionally, the SEC encourages companies to assess a broad range of “considerations” in the form of questions companies should consider as they disclose the evolving impact of COVID-19. These considerations include:

• What are the material operational challenges that management and the Board of Directors are monitoring and evaluating?
• Are decreases in cash flow having a material impact on your liquidity position and outlook?
• Have COVID-19 related impacts affected your ability to access your traditional funding sources on the same or reasonably similar terms as were available to you in recent periods?
• Are you at material risk of not meeting your covenants in your credit and other agreements?
• Have you reduced your capital expenditures and if so, how? Have you reduced or suspended share repurchase programs or dividend payments? Have you materially reduced or increased your human capital resource expenditures?
• Have you ceased any material business operations or disposed of a material asset or line of business?
• Are you able to timely service your debt and other obligations?
• Have you altered terms with your customers? Did you provide concessions or modify terms of arrangements as a landlord or lender or modify other contractual arrangements in a way that will have a material impact?

The full list of considerations is available on the SEC’s website.

CARES Act

The CARES Act provides financial assistance to certain companies impacted by COVID-19, including loans, tax relief and other benefits. The SEC guidance encourages companies that received such assistance under the CARES Act to consider disclosing the short and long-term impact of that assistance on their financial condition, results of operations, liquidity, and capital resources, as well as the related disclosures and critical accounting estimates and assumptions.

Ability to Continue as a Going Concern

Finally, the SEC guidance addresses disclosures that may raise substantial doubt about a company’s ability to meet its obligations arising from the events surrounding COVID-19. The SEC’s guidance states that companies should consider “whether conditions and events, taken as a whole, raise substantial doubt about the company’s ability to meet its obligations as they become due within one year after the issuance of the financial statements.” Where there is such doubt, management should provide appropriate disclosures in the company’s financial statements. Furthermore, in connection with MD&A disclosures, the SEC guidance encourages companies to consider making disclosures relating to the following: (i) whether there is substantial doubt about a company’s ability to continue as a going concern, (ii) whether they have defaulted on an outstanding obligation, (iii) any labor challenges or work stoppages, and (iv) if any of the previously stated challenges exist, whether management has a plan to address these concerns.

The SEC guidance further notes that COVID-19 may materially impact various other disclosures, such as disclosure controls and procedures and internal control over financial reporting.