As part of its response to COVID-19, and further to initial guidance issued on March 4, 2020, the SEC issued additional guidance on March 25, 2020, regarding public company disclosure requirements relating to COVID-19.

The guidance makes clear that the SEC is conscious of the rapidly evolving nature of the pandemic, and that disclosure will need to be tailored to each company based on a facts and circumstances analysis, but goes on to set out generally applicable guidelines for all companies. For instance, companies should disclose the effects COVID-19 has already had on the company, what management expects the future impact will be, how management is responding to evolving events, and how the company is planning for COVID-19-related uncertainties material to investment and voting decisions. The guidance notes that the existing disclosure framework for each of Management's Discussion and Analysis of Financial Conditions and Results of Operations (MD&A), business and operations disclosures, risk factors, legal proceedings, disclosure controls and procedures, internal controls over financial reporting and financial statements may require consideration of COVID-19 impacts, and that it may be appropriate to provide additional disclosure on COVID-19's effects even when there is no specific line-item requirement within the current disclosure framework.

The guidance highlights certain specific considerations that companies should take into account in crafting disclosure, including the following:

  • impact on financial condition and results of operations, including future operating results and near- and longterm financial condition;
  • impact on capital and financial resources, including overall liquidity position and outlook, cost of or access to capital and funding sources (such as revolving credit facilities), sources or uses of cash, ongoing ability to meet debt covenants and actions taken to remedy any deficiency;
  • effects on balance sheet assets and timely accounting for those assets, including significant changes in judgments in determining fair values;
  • anticipated 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;
  • impact of remote work arrangements on operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures and anticipated challenges in this area;
  • challenges in implementing business continuity plans and related expenditures and resource constraints; and
  • impact on demand for products or services, supply chain or distribution and changes in the relationship between costs and revenues (margins), human capital resources and productivity, travel restrictions and border closures.

The guidance encourages companies to proactively revise and update disclosure as facts and circumstances change. Depending on the particular circumstances, updating prior disclosure that has become inaccurate may be required. The guidance also notes that disclosure of COVID-19-related information must be broadly disseminated and selective disclosure must be avoided.

To the extent a company presents a non-GAAP financial measure to adjust for or explain the impact of COVID-19, the guidance indicates that it would be appropriate for management to highlight why it finds the measure useful and how the measure helps investors assess the impact of COVID-19. The SEC sets forth specific considerations in that regard, including the following:

  • when a GAAP financial measure is not available at the time of the earnings or other release because the measure may be impacted by COVID-19-related adjustments that are not yet final, companies can reconcile non-GAAP measures to preliminary GAAP results that either include any provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results (any provisional GAAP amount or range should reflect a reasonable estimate of COVID-19-related charges not yet finalized, such as impairment charges);
  • any non-GAAP financial measure should not be disclosed more prominently than the most directly comparable GAAP financial measure or range of GAAP financial measures;
  • 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 limit the measures in its presentation to those nonGAAP financial measures it is using to report financial results to the board of directors; and
  • 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, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.

As COVID-19 has impacted, and will continue to impact, many aspects of a company's operations, the SEC clearly expects companies to review and revise COVID-19-related disclosures as the crisis evolves to reflect the changing impact on the company. It is therefore important that companies stay abreast of developments in this area. An important takeaway from this guidance is that the staff of the Division of Corporation Finance of the SEC will be reviewing the timing, quality and transparency of a company's disclosures related to the impact of COVID-19 on its operations.

If you wish to read a further analysis of SEC guidance related to COVID-19, Shearman's related March 16, 2020, and March 27, 2020, client publications may be of interest.

On April 8, 2020, Chairman Clayton and William Hinman, Director of the SEC's Division of Corporate Finance, released a rare statement building upon the previous guidance and addressing the importance of quality disclosure, particularly in light of upcoming Q1 earnings reports and the related investor and analyst calls. In particular, the statement highlighted that historical information is likely to be relatively less significant in these reports and on these calls, and that a company's disclosure should instead focus on: (a) where the company stands today, operationally and financially, (b) how the company's COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (c) how its operations and financial condition may change as all our efforts to fight COVID-19 progress.

Chairman Clayton and Director Hinman asserted that substantive forward-looking disclosure (as opposed to generic boilerplate) is critical, not only for investors and the markets generally, but also for the nation as a whole as public and private entities and individuals seek to fight and recover from COVID-19. They urged companies to provide as much information as possible around their current status and their plans going forward, even amidst this time of great uncertainty and even though subsequent changes to forward-looking disclosure may be likely. In this context, they encouraged companies to avail themselves of the various safeharbors for forward-looking statements, and indicated that they we would not expect the SEC to second guess good faith attempts by companies to provide appropriately framed forward-looking information.

Originally published 13 May, 2020

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