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Efforts to contain the spread of the novel coronavirus (COVID-19) have led to the suspension of many economic activities, putting unprecedented strain on businesses. The Securities and Exchange Commission (SEC) recently issued guidance to help public companies provide investors and other stakeholders with useful, accurate financial statement disclosures in today’s uncertain marketplace.
What is the new disclosure guidance?
On March 25, the SEC issued interpretive guidance, Coronavirus (COVID-19), CF Disclosure Guidance: Topic No. 9. It highlights best practices in disclosing the risks and effects of the COVID-19 pandemic.
The guidance recommends using a principles-based disclosure system rooted in the concept of materiality. This means companies should disclose information that a reasonable person would find important in the total mix of information considered when deciding to sell or buy a company’s stock.
What are the questions for companies to consider?
The SEC guidance offers the following ten questions for companies to consider when making COVID-19-related disclosures:
- How has COVID-19 impacted your company’s financial condition and results of operations — and how might it impact future operations?
- How has COVID-19 impacted your company’s liquidity position and its capital and financial resources? Do you expect to incur any material COVID-19-related contingencies?
- How will COVID-19 affect assets on your company’s balance sheet and its ability to account for those assets in a timely manner?
- Have there been (or do you anticipate) any material impairments (for example, related to goodwill, intangible assets, long-lived assets, right of use assets and investment securities), increases in allowances for credit losses, restructuring charges, other expenses or changes in accounting judgments?
- Have remote working arrangements and other COVID-19-related circumstances adversely affected your company’s ability to maintain operations, including financial reporting systems, internal control over financial reporting, and disclosure controls and procedures? If so, what changes in controls have occurred during the current period?
- Have you experienced challenges or resource constraints in implementing your company’s business continuity plans, or do you foresee requiring material expenditures to do so?
- Do you expect COVID-19 to affect demand for your company’s products or services?
- Will COVID-19 have a material adverse impact on your company’s supply chain or the methods used to distribute products or services?
- Will your company’s operations be materially impacted by any constraints or other impacts on its human capital resources and productivity?
- Are travel restrictions and border closures expected to have a material impact on your company’s ability to operate and achieve its strategic goals?
This list of open-ended questions isn’t intended to be exhaustive. Each company will need to customize COVID-19-related disclosures using forward-looking information that’s based on assumptions about what may or may not happen in the future. In many situations, the impact will depend on factors beyond management’s control and knowledge.
The SEC has separately provided 45-day relief for certain reports that need to be filed by public companies. This will give management extra breathing room to assess the evolving situation and estimate the probable effects of the pandemic. Contact us for assistance crafting COVID-19 disclosures in these unprecedented conditions.