Yesterday, Corp Fin issued CF Disclosure Guidance: Topic 9A relating to operations, liquidity and capital resources disclosures companies should consider with respect to business and market disruptions from Covid-19. The guidance is intended to supplement Corp Fin’s earlier guidance, CF Disclosure Guidance: Topic 9, that John blogged about in March. Acknowledging that many companies have had to make operational adjustments in response to Covid-19, including for such things as telework arrangements, supply chain and distribution changes, new or modified customer payment terms, and other financing activities, the guidance reminds companies of their disclosure obligations:
It is important that companies provide robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment, particularly to the extent efforts present new risks or uncertainties to their businesses. 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.
The latest guidance also discusses disclosure obligations for companies receiving federal assistance under the CARES Act and says such companies should consider the short- and long-term impact of that assistance on their financial condition, results of operations, liquidity, and capital resources, as well as the related disclosures and critical accounting estimates and assumptions.
Corp Fin’s guidance also reminds companies of their disclosure obligations where there is substantial doubt about a company’s ability to continue as a “going concern” or the substantial doubt is alleviated by management’s plans. Similar to Corp Fin’s earlier guidance, the latest guidance provides a helpful list of questions that companies should ask themselves when preparing disclosure documents.
Financial Reporting: SEC Chief Accountant Reiterates Covid-19 Issues
Along with Corp Fin’s guidance, the SEC’s Chief Accountant, Sagar Teotia, issued a statement stressing the importance of high-quality financial reporting during Covid-19. The Office of Chief Accountant’s statement acknowledges many companies have had to make significant judgments addressing various accounting and financial reporting matters. Among other things, the statement reminds companies about disclosure obligations relating to such judgments as well as ICFR and “going concern” issues:
Companies should ensure that significant judgments and estimates are 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.
With that, the statement says that many companies have had to adjust financial reporting processes in response to the crisis and reminds companies about disclosure requirements. These changes may include consideration on how controls operate or can be tested and if there is any change in the risk of the control operating effectively in a telework environment. In addition, changes to the business and additional uncertainties may result in additional risks of material misstatement to the financial statements in which new or enhanced controls may need to be implemented to mitigate such risks. We remind preparers that if any change materially affects, or is reasonably likely to materially affect, an entity’s ICFR, such change must be disclosed in quarterly filings in the fiscal quarter in which it occurred (or fiscal year in the case of a foreign private issuer).
Like Corp Fin’s guidance, Teotia’s statement reminds companies to assess whether there is substantial doubt about the company’s ability to continue as a “going concern” and related disclosures. In instances where substantial doubt about an entity’s ability to continue as a going concern exists, management should consider whether its plans alleviate such substantial doubt, and make appropriate disclosures to inform investors. Such disclosures should include information about the principal conditions giving rise to the substantial doubt, management’s evaluation of the significance of those conditions relative to the entity’s ability to meet its obligations, and management’s plans that alleviated substantial doubt. If after considering management’s plans substantial doubt about an entity’s ability to continue as a going concern is not alleviated, additional disclosure is required. We note that GAAP requires such disclosure in the notes of the financial statements and this may be incremental to other disclosure requirements in filings with the Commission.
Today’s Webcast: “Proxy Season Post-Mortem: The Latest Compensation Disclosures”
Tune in today for the CompensationStandards.com webcast – “Proxy Season Post-Mortem: The Latest Compensation Disclosures” – to hear to hear Mark Borges of Compensia, Dave Lynn of CompensationStandards.com and Morrison & Foerster and Ron Mueller of Gibson Dunn analyze what was (and what was not) disclosed this proxy season.
– Lynn Jokela