On June 23, 2020, the Securities and Exchange Commission’s Division of Corporation Finance (Corp Fin) published CF Disclosure Topic No. 9A (Topic 9A) to provide further disclosure-related guidance to public companies whose operations and/or financial condition have been impacted by COVID-19. Specifically, Topic 9A provides guidance in the form of illustrative questions for assessing the impact of COVID-19 on disclosures relating to financial condition, results of operations, liquidity, and capital resources. This guidance supplements CF Disclosure Guidance: Topic No. 9 released by Corp Fin in March, which we covered in a prior blog post, and also refers companies to SEC Chief Accountant Sagar Teotia’s related statement on accounting and auditing matters, also released on June 23.
The new guidance is consistent with the March guidance, reframing some of the topics for potential disclosure to reflect that companies now have more data on how COVID-19 has impacted their businesses and results and adding a few topics for consideration. In addition, Corp Fin observes that “While we have observed companies making some of these disclosures in their earnings releases, we encourage companies to evaluate whether any of the information, in light of its potential materiality, should also be included in MD&A.” Many companies have already included COVID-19 disclosures in MD&A, but Corp Fin’s reminder may provide an opportunity for companies to review consistency between their earnings release and MD&A disclosures.
For companies that suspended or modified operations or undertook financing activities in response to the real or threatened impact of COVID-19, Topic 9A provides a list of illustrative questions for evaluating whether this information would be “material” to investors and should be disclosed. These questions relate to, among other things:
- operational adjustments and their impact on financial condition and liquidity;
- changes to revenues, financial condition, and overall liquidity position;
- funding sources and credit rating;
- capital expenditures;
- compliance with contractual covenants;
- servicing debt and other obligations;
- accommodations provided to customers, including payment extensions;
- impacts of supplier financing programs on financial statement disclosures; and
- disclosure of subsequent events and known trends or uncertainties.
One of these questions addresses the use of metrics, such as cash burn rate or daily cash use. Corp Fin reminds companies that are disclosing such metrics to provide clear definitions and an explanation of how management uses these metrics, consistent with the SEC’s January 2020 Interpretive Release on disclosures of key performance indicators and other metrics in MD&A.
Topic 9A also provides a list of illustrative questions to help public companies evaluate the impact of federal financial assistance received under the CARES Act on disclosures and critical accounting estimates and assumptions. These questions relate to, among other things:
- compliance with material terms and conditions;
- tax implications; and
- changes to material accounting estimates and judgments.
Finally, Topic 9A reminds public companies to evaluate their ability to continue as a going concern and to consider whether related disclosures would be necessary or appropriate. Corp Fin takes the position that a public company should disclose substantial doubt about its ability to meet its obligations as they become due within the year after the issuance of financial statements—even if that doubt is alleviated by management’s plans.