Monday, March 30. 2020
The effects of COVID-19 on companies and financial markets are evolving rapidly. Future impacts are unclear. The Division of Corporation Finance is monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations. The SEC has provided targeted regulatory relief where appropriate in light of evolving circumstances. The SEC also understands that reporting companies share the view that timely, robust, and complete information is essential to functioning markets.
While the SEC is encouraging timely reporting even given the various relief measures in place, it recognizes that it may be difficult to assess or predict with precision the broad effects COVID-19 has on industries or individual companies. That impact will depend on many factors beyond a company’s control and knowledge. Still, the SEC believes COVID-19 has had and will continue to have effects on a company that can be material to investment and voting decisions. This includes what management expects the future impacts will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties.
The Division of Corporation Finance suggests companies should consider the need for COVID-19-related disclosures within the context of the federal securities laws and principles-based disclosure system. The cornerstone of the system is disclosure of material information that is widely disseminated so that all investors can make informed decisions. The SEC has made clear that its disclosure requirements can apply to a broad range of evolving business risks even in the absence of a specific line item requirement that names the particular risk presented. There are also a number of existing rules or regulations which require disclosure about the known or reasonably likely effects and risks like those presented by COVID-19. Disclosure of these topics and COVID-19-related risks and impacts may be necessary or appropriate in management’s discussion and analysis, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements.
Assessing and Disclosing the Evolving Impact of COVID-19
Disclosure about the risks and effects related to COVID-19, including how the company and management are responding to them, is an evolving process and should be specific to a company’s situation. As companies assess COVID-19-related effects and consider their disclosure obligations, the following questions can serve as a basis for preparing relevant disclosure:
- How has COVID-19 impacted the company’s financial condition and results of operations? In light of changing trends and the overall economic outlook, how will COVID-19 impact future operating results and near-and-long-term financial conditions? Is it expected that COVID-19 will impact future operations differently than how it has affected the current period?
- How has COVID-19 impacted the company’s capital and financial resources, including its overall liquidity position and outlook? Along this vein, has the cost of or access to capital and funding sources, such as revolving credit facilities or other sources, changed? Is it reasonably likely these avenues of funding will change? Has there been a material impact to sources or uses of cash? Is there a material uncertainty about the ongoing ability to meet the covenants of credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy it? Consider the requirement to disclose known trends and uncertainties as it relates to the ability to service debts or other financial obligations.
- Does the company expect COVID-19 to affect assets on its balance sheet and its ability to account for those assets in a timely manner?
- Is there anticipation of any material impairments, increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on the company’s financial statements?
- Have COVID-19-related circumstances, such as remote work arrangements, adversely affected the company’s ability to maintain operations? This may include financial reporting systems, internal control over financial reporting, and disclosure controls and procedures. If there has been an adverse influence, what changes in company controls have occurred during the current period that materially affect or are reasonably likely to materially affect internal control over financial reporting? Are there challenges in maintaining these systems and controls?
- Have there been challenges in implementing business continuity plans? Does the company foresee problems requiring the material expenditures or resources to do so?
- Will COVID-19 materially affect the demand for the company’s products or services?
- Will COVID-19 adversely impact the company’s supply chain or the methods used to distribute the company’s products or services? Does the company expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
- Will the company’s operations be materially impacted by any constraints or other effects on human capital resources and productivity?
- Are travel restrictions and border closures expected to have a material impact on the company’s ability to operate and achieve its business goals?
The above list is not exhaustive. Each company is encouraged to carefully assess COVID-19’s impact and related material disclosure obligations. Companies may provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management. In addition, the SEC suggests that companies proactively revise and update disclosures as facts and circumstances change. The SEC also recognizes that much of the disclosure that would address the types of considerations noted above would involve forward-looking information that may be based on assumptions and expectations regarding future events. Companies that supply forward-looking information in an effort to keep investors informed about material developments can do so in a way as to avail them of the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act.
Trading Considerations in Light of COVID-19
Companies and other related persons should consider market activities in light of their obligations under federal securities laws. This includes the issuance or purchase of securities where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors. In these cases, the company, its directors and officers, and other corporate insiders who are aware of these matters should refrain from trading in the company’s securities until such information is disclosed to the public.
Broad and Nonselective Disclosure
When companies disclose material information related to the impacts of COVID-19, the SEC reminds them to take the necessary steps to avoid selective disclosures by disseminating such information broadly to the public. Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.
Reporting Earnings and Financial Results
Companies often release earnings estimates and other financial results in advance of finalizing the required financial reporting for the relevant period. The SEC appreciates that companies may be considering how to report the evolving impact of COVID-19 in light of unexpected nonrecurring charges and expenses. In addition, the impact of COVID-19 on businesses may present a number of novel or complex accounting issues that, depending on the particular facts and circumstances, may take time to resolve. In addition, the ongoing and evolving pandemic impact will likely make it more difficult for companies and their auditors to complete the work required to maintain timely filings. The SEC encourages companies to proactively address financial reporting matters earlier than usual. For example, if a company or its auditors needs to consult with experts to determine how the situation may impact its assets, it should consider engaging with those experts promptly so that its reporting remains as complete, accurate, and timely as possible.
The SEC also reminds companies of obligations under Item 10 of Regulation S-K and Regulation G with respect to the presentation of non-GAAP financial measures. In addition, the SEC has issued recent guidance relevant to performance metrics disclosure. To the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it would be appropriate to highlight why management finds the measure or metric useful as well as how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations. There may be instances where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In such situations, the Division of Corporation Finance would permit companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate or a range of reasonably estimable GAAP results. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges. A non-GAAP financial measure should not be disclosed more prominently than the most directly comparable GAAP financial measure or range of GAAP measures. In addition, in filings where GAAP financial statements are required (such as filings on Form 10-K or 10-Q), companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.
Furthermore, if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures as stated above, that company should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors. The SEC does not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company. Rather, companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board of Directors are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results. If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain why the line item(s) or accounting is incomplete to the extent practical and what additional information or analysis may be needed to complete the accounting.
Companies may consider presenting metrics related to COVID-19 or changing the method by which they calculate a metric as a result of COVID-19. In these cases, the SEC reminds companies of the principles explained in recent guidance related to metrics.
The SEC acknowledges that many companies are facing operational and other challenges as a result of COVID-19 and that this guidance does not address all disclosure considerations relating to the pandemic’s impact. The SEC’s overarching message is that health and safety are the first priority and that, as the SEC’s relief statements and staff guidance makes clear, those aspects should not be compromised to meet reporting requirements. As events evolve, the SEC will provide additional guidance, if appropriate.
Please continue to submit questions or seek guidance on other topics by completing the online form and directing it to the appropriate office. Also requests for no-action, interpretive, or exemptive letters can be submitted by online form. Requests for interpretation or waiver of financial statements can be submitted to DCAOLetters@sec.gov.
If entities require general assistance or are not able to contact a Division of Corporation Finance staff member about a pending matter, please submit requests to CFEmergency@sec.gov.