The SEC chief accountant issued a statement regarding the continued importance of high-quality financial reporting in light of the significant impacts of COVID-19 on June 23, 2020.
The SEC’s Division of Corporation Finance (Division) also issued CF Disclosure Guidance: Topic 9A to provide the SEC staff’s current views regarding operations, liquidity, capital resources, government assistance, and going concern disclosures that companies should consider with respect to business and market disruptions related to COVID-19.
High-Quality Financial Reporting
As many public companies prepared for their second-quarter financial reporting cycle, the Office of the Chief Accountant (OCA) emphasized the continued importance of high-quality financial reporting for investors in light of COVID-19.
In the statement issued by the SEC chief accountant, the OCA provides observations regarding various accounting and financial reporting issues raised by the COVID-19 pandemic including:
- Significant estimates and judgments
- Disclosure controls and procedures
- Internal control over financial reporting
- Going concern
- Complex and emerging financial reporting issues
Significant Estimates and Judgments
The OCA staff reminds companies that significant judgments and estimates should be disclosed in a manner that is understandable and useful to investors—and that the resulting financial reporting reflects and is consistent with the company’s specific facts and circumstances.
It’s noted that the OCA staff won’t object to well-reasoned judgments.
Internal Control Over Financial Reporting
Many companies have made operational adjustments due to the effects of COVID-19—such as moving to remote work environments—which could impact the company’s financial reporting processes.
The OCA staff reminds companies they may need to adapt how controls operate and can be tested if there’s a change in the risk of the control operating effectively in a remote work environment. Other changes to the business could also result in additional risks of material misstatement to the financial statements in which new or enhanced controls need to be implemented to mitigate such risks.
OCA staff remind companies if any change materially affects, or is reasonably likely to materially affect, an entity’s internal control over financial reporting, such a change must be disclosed in quarterly filings in the fiscal quarter in which it occurred.
To ensure the financial reporting system continues to provide timely and decision-useful information to investors and public capital markets, the Division of Corporation Finance is monitoring how companies are disclosing the effects and risks of COVID-19.
In addition, the Division of Corporation Finance is supplementing CF Disclosure Guidance: Topic 9 with additional disclosure considerations, summarized below.
Refer to our prior Alert for more detail on CF Disclosure Guidance: Topic 9.
Operations, Liquidity, and Capital Resources
In response to the effects of COVID-19 on business and markets, many companies are undertaking financing activities and operational adjustments including but not limited to:
- Obtaining and utilizing credit facilities
- Accessing public and private markets
- Implementing supplier finance programs and negotiating new or modified customer payment terms
- Transition to telework
- Supply chain and distribution adjustments
- Suspending or modifying certain operations to comply with health and safety guidelines to protect employees, contractors, and customers
Topic No. 9A guidance emphasizes these types of financing activities and operational adjustments may be material to investors. Companies should carefully consider their responsibility to disclose this information, particularly to the extent these activities and adjustments present new risks or uncertainties.
The Division has observed companies including some of these disclosures in earnings releases, but encourages companies to also evaluate whether any of the information, in light of its potential materiality, should be included in management discussion and analysis (MD&A).
As companies continue to assess COVID-19-related effects on their operations, liquidity, and capital resources, as well as the related disclosure obligations, the Division’s guidance encourages companies to consider the following illustrative questions:
- What are the material operational challenges that management is monitoring and evaluating?
- Has management altered operations, and if so, what is the expected impact on the company’s financial condition as a result of those changes?
- How is your overall liquidity position and outlook evolving?
- Have you accessed revolving lines of credit or raised capital in the public or private markets to address your liquidity needs?
- Have COVID-19-related impacts affected your ability to access your traditional funding sources?
- Are you at material risk of not meeting covenants in your credit and other agreements?
- Are you able to service your debt and other obligations in a timely manner, or have you taken advantage of available payment deferrals, forbearance periods, or other concessions?
- Have you reduced your capital expenditures, and if so, how?
- Have you altered terms with your customers, and if so, how have those actions materially affected your financial condition or liquidity?
- Are you relying on supplier finance programs to manage your cash flow?
- Have you assessed the impact of material events that occurred after the end of the reporting period, but before the financial statements were issued, and considered whether disclosure of subsequent events is required?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law on March 27, 2020, to provide both tax and nontax relief for companies as a result of the COVID-19 pandemic. The CARES Act includes financial assistance for companies in the form of loans and tax relief in the form of deferred or reduced payments and potential refunds.
The Division’s guidance states in addition to considering the financial impact of government assistance, companies should also consider the related disclosures and critical accounting estimates and assumptions.
While not an inclusive list, Topic No. 9A encourages companies to consider the following:
- Impact of the loan on the company’s financial condition, results of operations, liquidity, and capital resources
- Material terms and conditions of any assistance received and whether the company anticipates being able to comply with such terms and conditions
- How management expects the restrictions of any such assistance to impact the company’s revenues or income from continuing operations
- Impact on liquidity of any tax relief
- Accounting estimates and uncertainties involved in applying the accounting guidance
US Generally Accepted Accounting Principles (GAAP) require management to consider whether conditions and events raise substantial doubt about the company’s ability to meet its obligations as they become due within one year after the issuance of the financial statements.
This evaluation should be based on relevant conditions and events that are known, or reasonably knowable, at the date the financial statements are issued. It shouldn’t initially take into consideration management’s plans that aren’t yet fully implemented.
Topic No. 9A emphasizes when there’s substantial doubt about a company’s ability to continue as a going concern, or the substantial doubt is alleviated by management’s plans, management should provide appropriate respective disclosures in the financial statements.
The guidance also encourages management to consider disclosure of the following in the MD&A:
- Conditions and events that give rise to the substantial doubt about the company’s ability to continue as a going concern
- Company plans to address these challenges and progress made in implementing those plans
Additionally, in the chief accountant’s statement, the OCA staff reminded preparers that an evaluation of the entity’s ability to continue as a going concern should be performed each reporting period—including interim periods.
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