On March 25, 2020, the SEC’s Division of Corporation Finance published CF Disclosure Guidance: Topic No. 9, which provides the Division’s views regarding public companies’ reporting and other obligations under the federal securities laws in light of the current COVID-19 outbreak.
While acknowledging the rapidly evolving and unpredictable nature of the COVID-19 outbreak and the targeted disclosure relief recently provided by the SEC, the disclosure guidance reminds reporting companies of their obligation to provide timely and complete disclosure of the ways that the current situation has impacted and is likely to impact their business operations and financial results. The disclosure guidance points out that these disclosures may be necessary throughout a reporting company’s disclosure documents, including in management’s discussion and analysis, the business section, risk factors, the financial statements, legal proceedings, disclosure controls and procedures, and internal control over financial reporting. The disclosure guidance helpfully includes a series of illustrative questions that demonstrate the sort of inquiry that those responsible for preparing public disclosure documents will need to undertake in assessing the impact of the COVID-19 outbreak. We encourage all reporting companies to consider these questions as they prepare their disclosures.
In the disclosure guidance, the Division of Corporation Finance also addresses the difficulties posed by the current circumstances to reporting companies that may find it useful to disclose non-GAAP financial measures to investors in an earnings release issued before the analysis of all potential COVID-19-related adjustments is complete. The disclosure guidance states that companies in this situation may satisfy their obligations under Regulation G and/or Item 10(e) of Regulation S-K to reconcile non-GAAP measures to the most directly comparable GAAP measure by reconciling to a reasonable estimate of the GAAP measure that includes provisional amounts or a range of reasonably estimable results for the applicable GAAP measure. Only measures that are used by the company to report financial results to its board of directors should be reconciled and disclosed in this way, and any such reconciliation should include an explanation as to why the accounting is incomplete and what additional information or analysis will be needed to complete it. Any non-GAAP financial measure reported in a filing that requires the inclusion of final financial results, such as a Form 10-Q or Form 10-K, may only be reconciled to the final applicable GAAP measure. It goes without saying that a company should not disclose non-GAAP financial measures for the sole purpose of presenting a more favorable view of the company.
Lastly, the disclosure guidance cautions that companies and insiders considering engaging in securities transactions must carefully consider whether all material information regarding the impact of the COVID-19 outbreak on the company and its financial condition has been properly disclosed. If the company or insiders are in possession of material non-public information, they must refrain from trading in company securities until that information has been adequately disseminated to the public.