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SEC Provides COVID-19 Disclosure Guidance

March 26, 2020Client Alerts

On March 25, 2020, the SEC’s Division of Corporation Finance issued CF Disclosure Guidance: Topic 9 relating to the COVID-19 (the novel coronavirus) outbreak. The Division noted that it is monitoring how companies are reporting the effects and risks of the outbreak on their businesses, financial condition, and results of operations. Earlier in the year, when the outbreak was in its early stages and prior to the implementation of travel restrictions that have become more commonplace, many companies had not yet begun to include significant amounts of analysis on the potential impact of a widespread coronavirus outbreak in their disclosures. 

The Division noted that the COVID-19 outbreak is an evolving issue, and that companies should disclose the risks and effects of the coronavirus that are specific to their situations. The Division then provided a listed (not intended to be exhaustive) of the types possible effects the COVID-19 outbreak could have on a company:

  • How has COVID-19 impacted your current and future financial condition and results of operations? 
  • How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook?  
  • 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, investment securities), increases in allowances for credit losses, restructuring charges, other expenses?
  • Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations?
  • Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? 
  • 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
  • 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?

The Division also reminded companies that although disclosure that would address potential effects of the COVID-19 outbreak would involve forward-looking information that may be based on various assumptions such disclosures can be made in a manner that would avail companies of the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act for this information. 

For upcoming filings of periodic reports, companies should carefully consider and discuss with legal counsel where additional disclosure regarding the risks and effects of the coronavirus would be appropriate, with particular attention to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” In the event effects of COVID-19 are such that a company may want to change guidance, pre-announce shortcomings in quarterly guidance or disclose other changes in the business, they should consult with legal counsel to ensure they are doing so in a manner that complies with Regulation FD and also to take advantage of the safe harbors provided for forward-looking statements and other applicable legal requirements.

Additionally the Division noted that companies that report non-GAAP financial measures in its earnings releases may be unable to finalize the reconciliation to a final GAAP metric because the measure may be impacted by COVID-19-related adjustments that may require additional information and analysis to complete. In those instances, the Division 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. However, it should then limit the presentation of non-GAAP financial measures to those that the company reports to its Board of Directors and 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.