Authored by Allison Handy
On March 25, 2020, the Securities and Exchange Commission’s Division of Corporation Finance (Corp Fin) provided guidance to public companies on disclosures related to the coronavirus (COVID-19) in the form of CF Disclosure Guidance: Topic No. 9. The guidance is largely consistent with what many companies have already been thinking and doing, including topics we covered in a client update regarding disclosure and securities law considerations earlier this week.
Corp Fin’s guidance includes a useful list of disclosure topics to consider relating to the impact of the current crisis on present and future operations. Topics on Corp Fin’s list include the following:
- Impacts on financial condition, results of operations, financial resources, and liquidity;
- Changes to fair value determinations for assets on the balance sheet;
- Anticipated material impairments or increases in allowances for various losses and expenses;
- Impacts on business operations, including internal control over financial reporting and disclosure controls and procedures;
- Challenges in implementing business continuity plans; and
- Material impacts on demand for products or services, supply chain or distribution, and productivity.
Companies should not consider this a comprehensive checklist of all potentially relevant topics but may want to consult it in framing their thinking about disclosure and risk management.
The guidance also addresses non-GAAP disclosure considerations in connection with conveying the impact of COVID-19 on businesses. For purposes of an earnings release, Corp Fin would not object to a company reconciling a non-GAAP measure to either preliminary GAAP results or a reasonable estimate of a range of GAAP results. As an example, EBITDA could be reconciled to GAAP earnings, a reasonable estimate of GAAP earnings that includes a provisional amount, or a reasonable estimate of a range of GAAP earnings. For provisional amounts and estimates, the company should explain why the line item is incomplete and what additional information or analysis is needed to complete the accounting. Corp Fin notes that this alternative reconciliation approach would not be appropriate for a Form 10-Q or 10-K, which require GAAP financial statements.
In providing this guidance on non-GAAP disclosure considerations, Corp Fin reminded companies of the usual non-GAAP disclosure requirements, including that if a company uses a non-GAAP measure to adjust for or explain the impact of COVID-19, it should include explanation of why management finds that measure useful and how it helps investors assess the impact of the crisis on the company results.
Corp Fin also took this opportunity to remind companies of its January 2020 guidance on disclosures of key performance indicators and other metrics in MD&A. This guidance focused on providing complete and clear disclosure regarding such metrics, including clear definitions and explanations why the metric is useful and how management uses it.