As companies continue to face the challenges and economic effects of the COVID-19 pandemic, the SEC Division of Corporation Finance released Topic No. 9 which provides guidance on items that companies should consider for disclosure. The guidance stresses the importance of assessing the risks and impacts that COVID-19 is expected to have on a company since this knowledge could influence investors’ decisions. Disclosures should include both the assessment of the company’s specific circumstances and management’s planned responses. The guidance lists items that management should consider in their assessment, as summarized in the following bullet points:
Impact on current and future financial condition as well as results from operations including whether there will be a change in demand for the company’s products or services and if it is expected that there will be a shift in the relationship of costs and revenues
Impact on capital and financial resources including liquidity, access to funding, and the capability to meet debt covenants
Contingencies arising as a result of the COVID-19 pandemic
Impact on significant accounting judgments including impairment and allowances/reserves
Effects of remote work arrangements on operations, financial reporting systems, internal control over financial reporting, and productivity - as well as considerations of the impact on the company’s human capital resources
Whether increased costs or limited resources have caused the implementation of business continuity plans to be disrupted
Disruptions to the company’s supply chain or distribution of the company’s products or services including the effect of travel restrictions on operations
In addition to the considerations noted above, the guidance reaffirms the obligation of a company and insiders to refrain from trading securities until material COVID-19 disclosures have been made public. Furthermore, it is noted that a company must follow Regulation FD when material information is disclosed which requires avoiding selective disclosures by disseminating such information broadly to the public and considering whether the company should update previous disclosures if those disclosures are now considered to be inaccurate.
Lastly, the guidance addresses the presentation of non-GAAP financial or performance measures to present the effects on a company of the COVID-19 pandemic. If a non-GAAP financial measure is presented, the company should disclose management’s explanation as to why the measure is useful in assisting investors in understanding the impact that COVID-19 has had on the company’s financial position and results of operations. Additionally, the guidance notes that if a GAAP financial or performance measure has been affected by COVID-19 and therefore is not available to be disclosed, the company could reconcile the non-GAAP financial measure to the preliminary GAAP result. The GAAP result should include a provisional amount based on a reasonable estimate of COVID-19 effects or a range of reasonably estimable GAAP results. It should be noted that GAAP financial statement filings like the Form 10-K and Form 10-Q should not include provisional amounts noted above.
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