June 25, 2020
Due to the ongoing assessment of the impact of COVID-19 on companies’ operations, liquidity and capital resources and overall economic and market conditions, companies should take special care in preparing for their quarterly reporting. To aid in this effort, the staff (the “Staff”) of the Securities and Exchange Commission (“SEC”) has posted a new set of questions that companies should consider in evaluating whether certain disclosures should be included in their earnings release and, in light of its potential materiality, in the management discussion and analysis (“MD&A”) included in the periodic reports (e.g., the upcoming Form 10-Q for the second quarter of 2020).
On June 23, 2020, the Division of Corporation Finance of the SEC issued disclosure guidance in the form of CF Disclosure Guidance: Topic No. 9A (“Topic 9A”) providing additional views regarding operations, liquidity, and capital resources disclosures that companies should consider with respect to business and market disruptions related to COVID-19. This complements CF Disclosure Guidance: Topic No. 9 (“Topic 9”) published on March 25, 2020 (which was addressed on our previous post, available here).
Separately, on June 23, 2020, the SEC Chief Accountant issued a Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19, highlighting the Office of the Chief Accountant’s recent work to promote high-quality financial reporting, and its engagement with the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, the International Accounting Standards Board, the International Organization of Securities Commissions, the International Federation of Accountants, and the Public Interest Oversight Board. This complements the Chief Accountant’s previous Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19 issued on April 3, 2020.
With many public companies now preparing for their next reporting cycle (e.g., the upcoming Form 10-Q for the second quarter of 2020), the SEC continues to emphasize the important role the financial reporting system plays in the functioning of the markets and in the national effort to mitigate the COVID-19 pandemic (see, e.g., SEC Chairman Jay Clayton, Remarks to the Financial Stability Oversight Council) and, consequently, the importance of disclosure controls and procedures and internal control over financial reporting. As Chairman Clayton recently stated in testimony before the House Committee on Financial Services:
A fundamental principle for the SEC and our capital markets has always been—and today is even more important than ever—the importance of issuers providing investors with financial and operational disclosures that are clear, high-quality and timely. Staff has been monitoring and providing guidance with respect to corporate and municipal filings and disclosures of U.S. issuers, as well as foreign companies listed in the United States… I believe that the timely disclosure of high-quality information—be it positive, negative or neutral, and be it definitive or subject to uncertainty in light of the circumstances—increases credibility and has a generally calming value that contributes to market function, and in turn, reduces the potential for systemic risk.
Relatedly, the SEC announced a roundtable to be held on June 30, 2020: “Q2 Reporting: A Discussion of COVID-19 Related Disclosure Considerations.” Moderated by SEC Chair Jay Clayton, the roundtable’s participants will include National Economic Council former director Gary Cohn, Silver Lake Partners co-founder Glenn Hutchins, Advent Capital Management President Tracy Maitland, and BlackRock Vice Chair Barbara Novick. The roundtable will be webcast live on the SEC’s website.
As with Topic 9, Topic 9A includes questions companies can ask when considering their disclosure obligations. The Staff makes clear that Topic 9A represents the Staff’s views and does not change applicable law or add new disclosure obligations.
Topic 9A advises that companies consider how operational adjustments undertaken due to COVID-19 (e.g., transition to telework, supply chain and distribution adjustments, and suspending or modifying certain operations to comply with health and safety guidelines) and financing activities undertaken due to COVID-19 (e.g., obtaining and utilizing credit facilities, accessing public and private markets, implementing supplier finance programs, and negotiating new or modified customer payment terms) may be required to be disclosed in MD&A under Item 303 of Regulation S-K. While each company must consider its own specific facts and circumstances, the questions posed by the Staff can help a company identify factors that may need to be addressed as a result of their impact on the company’s operations, liquidity, and capital resources. The Staff encourages companies to consider a broad range of topics when preparing their disclosures, including:
Overall Liquidity Position and Outlook
Use of Specific Metrics by Management
Cost of Capital
Subsequent Events Since the End of the Reporting Period and Known Trends or Uncertainties
In addition, Topic 9A notes that companies should consider addressing the short- and long-term impact of any government assistance (including under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (available here)) on financial condition, results of operations, liquidity and capital resources. This includes:
The Statement from the Chief Accountant and the Topic 9A guidance also each underscore that companies should pay particular attention to the going concern evaluation in connection with the issuance of the financial statements (see our client alert on Key Considerations for Issuers and Auditors Regarding Going-Concern Analysis). Considering all conditions and events (including those described above), taken as a whole, management should evaluate the company’s ability to meet its obligations as they become due within one year after the issuance of the financial statements. If the financials will include a going concern qualification, then companies should include additional MD&A disclosure about:
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding developments related to the COVID-19 pandemic. For additional information, please contact the Gibson Dunn lawyer with whom you usually work, any lawyer in the firm’s Securities Regulation and Corporate Governance and Capital Markets practice groups, or the authors:
Hillary H. Holmes – Houston (+1 346-718-6602, firstname.lastname@example.org)
Andrew L. Fabens – New York (+1 212-351-4034, email@example.com)
James J. Moloney – Orange County, CA (+1 949-451-4343, firstname.lastname@example.org)
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, email@example.com)
Rodrigo Surcan – New York (+1 212-351-5329, firstname.lastname@example.org)
Candice Lundquist – Orange County, CA (+1 949-451-3973, email@example.com)
Please also feel free to contact any of the following practice leaders:
Securities Regulation and Corporate Governance Group:
Elizabeth Ising – Co-Chair, Washington, D.C. (+1 202-955-8287, firstname.lastname@example.org)
James J. Moloney – Co-Chair, Orange County, CA (+1 949-451-4343, email@example.com)
Lori Zyskowski – Co-Chair, New York (+1 212-351-2309, firstname.lastname@example.org)
Brian J. Lane – Washington, D.C. (+1 202-887-3646, email@example.com)
Ronald O. Mueller – Washington, D.C. (+1 202-955-8671, firstname.lastname@example.org)
John F. Olson – Washington, D.C. (+1 202-955-8522, email@example.com)
Michael J. Scanlon – Washington, D.C. (+1 202-887-3668, firstname.lastname@example.org)
Gillian McPhee – Washington, D.C. (+1 202-955-8201, email@example.com)
Michael A. Titera – Orange County, CA (+1 949-451-4365, firstname.lastname@example.org)
Capital Markets Group:
Stewart L. McDowell – Co-Chair, San Francisco (+1 415-393-8322, email@example.com)
Peter W. Wardle – Co-Chair, Los Angeles (+1 213-229-7242, firstname.lastname@example.org)
Andrew L. Fabens – Co-Chair, New York (+1 212-351-4034, email@example.com)
Hillary H. Holmes – Co-Chair, Houston (+1 346-718-6602, firstname.lastname@example.org)
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