On June 23, 2020, in light of the ongoing global COVID-19 pandemic, the Securities and Exchange Commission’s (SEC) Division of Corporation Finance released CF Disclosure Guidance: Topic No. 9A (the Supplemental Guidance), which supplements CF Disclosure Guidance Topic No. 9 (the Original Guidance). The Supplemental Guidance provides the Division’s additional views regarding operations, liquidity, and capital resources disclosures that companies should consider with respect to business and market disruptions due to the COVID-19 pandemic.
In the Original Guidance, the Division addressed disclosure requirements, trading on insider information and reporting earnings, and financial results in light of COVID-19. The Supplemental Guidance provides companies additional considerations to assist their evaluation of COVID-19 related effects and generate robust, forward-looking disclosures.
In the Supplemental Guidance, the Division reiterates that it continues to monitor companies’ disclosures of the impacts and risks of the ongoing COVID-19 pandemic on their businesses, financial condition, and results of operations. As with the Original Guidance, the Division urges companies to actively revise and update disclosures to help investors assess the actual and future impact of COVID-19 through the lens of management. The Division notes that “[t]hese disclosures should enable an investor to understand how management and the Board of Directors are analyzing the current and expected impact of COVID-19 on the company’s operations and financial condition, including liquidity and capital resources.”
The Division addresses three general topics in the Supplemental Guidance:
1. Operations, Liquidity, and Capital Resources
Companies have had to make a broad range of material operational changes in response to the effects of the pandemic, including the transition to remote-work, supply-chain and distribution adjustments, and changes related to health and safety guidelines to protect employees, contractors and customers, including in connection with transitions back to the workplace. The Supplemental Guidance notes that companies should carefully consider their obligation to disclose such substantial changes to investors. In addition, the current economic climate has pushed many companies to undertake a wide range of financing activities, such as obtaining new credit facilities, accessing public and private markets, and negotiating new or modified financing programs. Since the new financing tools may include novel terms and structures, the Division urges companies to provide transparent disclosures about their plans to manage short- and long-term liquidity and funding risks, especially pertaining to new risks faced by their businesses. The Division notes a potential discrepancy about these disclosures being included in earnings releases but not included in Management’s Discussion and Analysis (MD&A), and advises that companies consider whether to include these disclosures, in light of their potential materiality, in MD&A.
See Appendix A for a list of questions the Division believes companies should consider when assessing their specific situation in the context of the ongoing COVID-19 pandemic.
2. Government Assistance – The CARES Act
Many companies have been receiving financial assistance and tax relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in the form of loans, deferred or reduced payments, and possible refunds. The Division recommends that companies receiving federal assistance should consider the short and long-term effect of that assistance on their financial condition, operations, liquidity, capital resources, appropriate disclosures (e.g. MD&A and U.S. GAAP disclosures), accounting estimates and assumptions. Appendix A also includes questions the Division believes companies should consider with respect to financial assistance and tax relief under the CARES Act.
3. Ability to Continue as a Going Concern
Companies should evaluate whether the total economic effects of COVID-19 raise substantial doubt about their ability to continue as a going concern. If the adverse impact of the pandemic raises substantial doubt about a company’s ability to meet its obligations as they become due within one year after the issuance of the financial statements, the Division advises that management should provide appropriate disclosures in the financial statements and outline any plans to alleviate such doubt, as required by U.S. GAAP. Appendix A includes questions the Division believes companies should consider with respect to MD&A disclosures related to a company’s ability to continue as a going concern.
4. Additional Information
As it did in the Original Guidance, the Division again emphasizes that companies should consider the impact of COVID-19 on other disclosures, including disclosure controls and procedures (DCP) and internal control over financial reporting (ICFR). The Division also refers to the SEC Chief Accountant Safar Teotia’s Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19 with respect to accounting and auditing matters related to COVID-19 (the June OCA Statement).
The June OCA Statement on the Continued Importance of High-Quality Financial Reporting
In conjunction with the Division’s Supplemental Guidance, the Office Chief Accountant (OCA), issued the June OCA Statement regarding the importance of high-quality financial reporting in the context of COVID-19. The June OCA Statement expands and supplements the April OCA Statement released by the OCA on April 3, 2020. In particular, the June OCA Statement focused on:
1. Significant Estimates and Judgments
As noted in the April OCA Statement, many companies had to make important judgments in accounting and financial reporting matters. The June OCA Statement urges companies to ensure that significant judgments and estimates are disclosed in a manner that is “understandable and useful to investors, and that the resulting financial reporting reflects and is consistent with the company’s specific facts and circumstances.”
2. Disclosure Controls and Procedures and Internal Control over Financial Reporting
The June OCA Statement emphasizes the importance of robust internal accounting controls to high-quality, reliable financial reporting. Some companies have adopted, or are adapting, their financial reporting processes as they respond to the changing environment. These changes may include consideration on how controls operate or can be tested and if there is any change in the risk of the control operating effectively in a telework environment. In addition, changes to the business and additional uncertainties may result in additional risks of material misstatement to the financial statements in which new or enhanced controls may need to be implemented to mitigate such risks. The June OCA Statement reminds companies that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in its Quarterly Report on Form 10-Q for the fiscal quarter in which it occurred (or the Annual Report on Form 10-K, in the case of the fourth quarter).
3. Ability to Continue as a Going Concern
The June OCA Statement reminds companies that management should consider whether relevant 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. In instances where substantial doubt about a company’s ability to continue as a going concern exists, management should consider whether its plans alleviate such substantial doubt and make appropriate disclosures to inform investors. Such disclosures should include information about the principal conditions giving rise to the substantial doubt, management’s evaluation of the significance of those conditions relative to the company’s ability to meet its obligations, and management’s plans that alleviated substantial doubt. If after considering management’s plans substantial doubt about a company’s ability to continue as a going concern is not alleviated, additional disclosure is required.
In addition, the June OCA Statement also states that although an auditor’s review of interim financial information is not designed to identify conditions or events that indicate substantial doubt about a company’s ability to continue as a going concern, the auditor may become aware of such conditions or events in the course of performing review procedures. In such cases, the auditor should inquire with management and consider the adequacy of the relevant disclosures’ conformity with GAAP. The June OCA Statement reminds auditors that after performing such procedures, to the extent the auditor determines the relevant disclosure is inadequate such that it represents a departure from GAAP, the auditor should extend the procedures, evaluate the results and communicate as appropriate with the company and its audit committee.
4. Vital Audit Committee Role
The June OCA Statement reiterates the key role that audit committees play in the financial reporting system through their oversight of financial reporting, including ICFR and the external, independent audit process. The OCA intends to continue to be proactive in engaging with audit committee members to understand current market developments as well as to solicit their perspectives on improving the oversight of financial reporting.
Operations, Liquidity, and Capital Resources Questions
CARES Act Financial Assistance and Tax Relief Questions
Going Concern MD&A Disclosure Questions