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COVID-19: SEC issues new guidance

Mar 26, 2020

Yesterday, the SEC issued updated guidance regarding public company reporting obligations in light of the coronavirus pandemic (COVID-19).

To augment our recent article “COVID-19: What you need to know now regarding your SEC disclosure obligations,” in the updated guidance, the SEC encourages companies to focus on particular questions related to COVID-19 when crafting disclosure in their upcoming earnings releases, quarterly and annual reports and proxy statements as follows:

• How has COVID-19 impacted your financial condition and results of operations?  In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition?  Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
• How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook?  Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources, changed, or is it reasonably likely to change?  Have your sources or uses of cash otherwise been materially impacted?  Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements?  If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?  Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk.  Do you expect to disclose or incur any material COVID-19-related contingencies?
• How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets?
• Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), 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 your financial statements?
• Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures?  If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting?  What challenges do you anticipate in your ability to maintain these systems and controls?
• Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so?  Do you face any material resource constraints in implementing these plans?
• Do you expect COVID-19 to materially affect the demand for your products or services?
• Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services?  Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
• Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
• Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?
  

In addition, as we covered in our previous article, the SEC reminded companies and their insiders of their obligations to comply with Regulation FD and its prohibition against selectively disseminating material, non-public information, and insider trading laws which prevent trading activity when in possession of material, non-public information.

The SEC also (i) recognized that the impact of COVID-19 may present a number of novel or complex accounting issues that, depending on the particular facts and circumstances, may take time to resolve, (ii) acknowledged that COVID-19 will likely make it more difficult for companies and their auditors to complete the work required to maintain timely filings, and (iii) encouraged companies to proactively address financial reporting matters earlier than usual.

Finally, the SEC reminded companies of their obligation to comply with, and reiterated with specificity certain portions of, the federal securities laws relating to the presentation of non-GAAP financial metrics. The SEC acknowledged that there may be situations when there may not be a GAAP financial measure 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 these situations, the SEC stated that it would not object to 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. In such instances, however, companies should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to its Board of Directors. Further, with respect to a periodic report such as a Form 10-K or a Form 10-Q in which GAAP metrics are required to be presented, the SEC stated that companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.

See below for additional links discussing your company’s SEC obligations during the COVID-19 pandemic: “Coronavirus (COVID-19): SEC issues dilatory relief for issuers affected by the coronavirus,” “Public companies may consider virtual annual meetings in light of coronavirus,” and “SEC extends coronavirus (COVID-19) relief for issuers.” If you have any questions regarding this post or would like to discuss further your company’s SEC reporting obligations, please contact any of the Related Professionals, any other member of Waller’s Capital Markets & Securities practice or your regular Waller contact at (615) 244-6380.