SEC financial reporting under the microscope: Coronavirus risk disclosures

by Tobi Carter Richards, J.D.


Public health officials are responding to an outbreak of respiratory disease caused by a novel coronavirus (COVID-19) that was first discovered in Wuhan City, Hubei Province, China in December 2019 and has now been detected in more than 55 locations internationally, including the United States (U.S.).  On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization (WHO) declared the outbreak a “public health emergency of international concern,” and on the very next day, Health and Human Services Secretary Alex M. Azar II declared the coronavirus outbreak a public health emergency for the U.S.

Interestingly, public health officials are not the only ones taking precautionary measures.  Public companies, too, are making efforts to shield themselves from the far-reaching global and economic impacts of COVID-19 as they struggle with their exposure to potential volatility.  The need for a new level of diligence for coronavirus risks has not escaped the attention of the Securities and Exchange Commission (SEC).  In a January 30, 2020 public statement, SEC Chairman Jay Clayton noted that he has asked the Staff to keep a watchful eye on disclosures related to the current and potential effects of the coronavirus and to provide guidance where appropriate. Though he acknowledged the uncertainty involved in assessing these effects, he emphasized that “how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision.” Chairman Clayton revisited this matter in another public statement on February 19, 2020 when he, SEC Division of Corporation Finance Director Bill Hinman, SEC Chief Accountant Sagar Teotia, and PCAOB Chairman William D. Duhnke III spoke about their recent dialogue with senior leaders at the largest U.S. audit firms, particularly about the impact that companies’ exposure to the effects of the coronavirus could have on financial reporting and audit quality.

This Special Report identifies considerations that public companies should keep top-of-mind as they assess the current and potential impact of the coronavirus on their businesses and work to factor coronavirus risks into their reporting and disclosure practices.  The Report also includes excerpts from SEC filings so that registrants may see how peers and others across various industries are handling coronavirus-related disclosures.

Coronavirus risks: what to consider

The following disclosure considerations are critical as registrants evaluate their coronavirus risks:

Questions to ponder. Registrants should ask themselves questions related to supply-and-demand challenges, the market, people, and products and services, including, among others:

  • Am I experiencing or anticipating any changes in demand from customers based, or from products made, in affected areas?
  • Am I making alternative arrangements to purchase goods from sources outside of impacted areas? If so, are the associated costs or other risks significant? Will this impact the valuation of my inventory?
  • Am I encountering or anticipating issues with the flow of goods to and from affected areas because of travel restrictions?
  • Am I closing stores and/or offices?
  • Am I faced with product shortages?
  • Am I experiencing staffing shortages because of quarantines in affected areas?
  • Am I too heavily invested in Chinese stocks or in other investments? Do any require impairment?
  • Are some of my suppliers or customers experiencing credit difficulties?
  • Am I exposed to the price volatility of crude oil and/or other commodities impacted by the coronavirus?
  • Am I exposed to foreign currency volatility?
  • Are my hedging strategies still appropriate?
  • How is the market volatility affecting my pension and other postretirement benefits?
  • If estimates on earnings and profits (E&P) are changing, does the valuation allowance on deferred tax assets have to be revised?
  • Is my liquidity risk increasing?

Commercial contract implications. Many companies are claiming that the coronavirus outbreak constitutes a force majeure event or some other legal basis for nonperformance under commercial contracts, which could prove a threat to registrants’ business and operations.  Registrants that are parties to commercial agreements impacted by the outbreak should analyze their rights and obligations and consider whether there are alternative approaches to carrying out the contractual obligations.

For registrants negotiating new commercial agreements, it would be good practice to carefully evaluate the proper allocation of risks and consequences of further business decline on account of the outbreak.

Periodic filings. As registrants consider these and other disclosure considerations related to their coronavirus risks, they should craft tailored disclosures in their Securities Exchange Act (Exchange Act) periodic reports on Forms 10-K, 10-Q, 20-F, and 40-F discussing risks posed to their business and operations.  Though not an exhaustive list, sections of periodic reports covering the following are where many companies are including their coronavirus-related disclosures:

  • Risk factors
  • Management’s discussion and analysis of financial condition and results of operations (MD&A)
  • Description of business
  • Market risk
  • Notes to financial statements

Other filings. Coronavirus-related disclosures are also appropriate in:

  • Exchange Act current reports on Form 8-K, used to notify the public of material events that could be of importance to shareholders or the SEC.  Some sections where coronavirus-related disclosures can be found include those pertaining to:
        - Results of operations and financial condition
        - Regulation Fair Disclosure (FD)
        - Other events
  • Exchange Act current reports on Form 6-K, used by foreign private issuers of securities to communicate material information that is made public in their home countries.  Some sections where coronavirus-related disclosures can be found include those pertaining to:
        - Financial condition
  • Exchange Act registration statements on Form 10, used to register a class of securities for potential trading on U.S. exchanges.  Some sections where coronavirus-related disclosures can be found include those pertaining to:
        - Risk factors
  • Securities Act registration statements on Forms S-1, S-3, S-4, F-1, F-3 and F-4, required for the registration of certain securities (i.e., the S forms are issued by public companies based in the U.S., while the F forms are issued by foreign private issuers).  Some sections where coronavirus-related disclosures can be found include those pertaining to:
        - Risk factors
        - Business
        - MD&A
  • Rule 424(b) prospectuses, used to clarify or update securities offering information before a company goes public.  Some sections where coronavirus-related disclosures can be found include those pertaining to:
        - Risk factors

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