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As part of its response to the effects and economic disruption that the novel coronavirus disease 2019 (“COVID-19”) is causing to the worldwide economy, on March 25, 2020, the Division of Corporation Finance of the U.S. Securities and Exchange Commission (“SEC”) issued additional guidance regarding public company disclosure requirements with respect to COVID-19.
This client alert supplements and updates our client alert issued on March 16, 2020, which discusses disclosure and capital markets considerations for U.S. listed public companies.
The guidance reminds companies that, while it is difficult to predict with precision the effects of COVID-19 on a company, management’s views on COVID-19’s effects and future impact on the company can be material to investment and voting decisions.
The guidance notes that the existing disclosure framework for MD&A, business and operations disclosures, risk factors, legal proceedings, disclosure controls and procedures, internal controls over financial reporting and financial statements all may require consideration of COVID-19 impacts. In addition, the guidance states that it may be appropriate to provide additional disclosure on COVID-19’s effects even when there is no specific line-item requirement in the current disclosure framework.
The guidance recognizes that the pandemic is rapidly evolving and that COVID-19-related disclosures will need to be tailored to the company, but outlines certain considerations that companies should take into account in crafting disclosure, including the following:
The guidance encourages companies to proactively revise and update disclosures as facts and circumstances change. Depending on the particular circumstances, updating prior disclosure that has become inaccurate may also be required.
Where a company has become aware of a material effect or risk associated with COVID-19, the company, its directors and officers, and other corporate insiders should be restricted from trading in the company’s securities until the information is disclosed to the public.
Disclosure of COVID-19-related information must be broadly disseminated and selective disclosure must be avoided.
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 for the company and its auditors. For this reason, the SEC staff encourages companies to proactively address financial reporting matters and engage with experts earlier than usual in the reporting cycle.
To the extent a company presents a non-GAAP financial measure to adjust for or explain the impact of COVID-19, it would be appropriate to highlight why management finds the measure useful and how it helps investors assess the impact of COVID-19. The SEC staff highlights several considerations in that regard:
The presentation of non-GAAP measures related to COVID-19, or changes to existing measures, may require additional disclosures to enable consistency and comparability across periods.
The SEC’s latest guidance recognizes that COVID-19 has impacted, and will continue to impact, many aspects of a company’s operations. It is important for companies to not consider COVID-19 disclosures as a one-time event. The SEC clearly expects companies to review and revise COVID-19-related disclosures as the crisis changes over time and to reflect the changing impact on the company. As a result, a company’s disclosure committee and others responsible for disclosure and financial reporting should recognize that their mandate includes consideration of disclosure obligations related to COVID-19. To carry out this responsibility, the disclosure committee should stay informed about COVID-19 developments generally and ensure it has access to information related to a company’s response to the crisis and how the specific impact on the company is developing as the crisis extends. An important takeaway from this guidance is that the staff of the Division of Corporation Finance will be reviewing the timing, quality and transparency of a company’s disclosures related to the impact of COVID-19. At some point in the future, we would expect the Division of Corporation Finance to issue comments on these disclosures.
Special thanks to Polina Pristupa for her contribution to this publication.