By Bill Flook
The legislative stimulus package rolled out on March 23, 2020, by the House Financial Services Committee in response to the coronavirus pandemic would require public companies to make a series of new disclosures to investors, including of risks posed by pandemics.
H.R. 6321, the Financial Protections and Assistance for America’s Consumers, States, Businesses, and Vulnerable Populations Act, is a conglomeration of more than 40 bills designed to soften the economic blow of the COVID-19 crisis.
Some of the provisions were championed by individual House Financial Services Committee members and mirror those in a plan put forth by the panel a week ago.
Under one section, public companies would be required to add new disclosures in their annual reports related to supply chain disruption risk and related contingency plans. Those include risks related to the dependency on sole source arrangements, shipping risks, and risks “arising from natural disasters, pandemics, extreme weather, armed conflicts, refugee and related disruptions, trade conflicts or disruptions, and labor wage, safety, and health care practices.”
Under a separate provision, issuers would be required to make new disclosures related to how their business is exposed to global pandemics “including risks to health and worker safety faced by the issuer’s employees and independent contractors.” Companies would also need to describe the steps they are taking to protect their workforces, among other steps to mitigate risks.
Another corporate governance provision borrows from a recent bill filed by Sen. Tammy Baldwin, a Wisconsin Democrat. Under the provision, a so-called accelerated filer receiving federal aid related to COVID-19 would be required to allow employees to elect at least on third of the board of directors in a “one-employee-one-vote” election process. The SEC defines as an accelerated filer as an issuer with a public float of $75 million or more but less than $700 million.
The bill also places a temporary stop on stock buybacks, which would accomplish another aim of Baldwin’s legislation S. 3540, the Reward Work Act, which the Wisconsin Democrat filed on March 19.
The SEC, under the Democratic stimulus measure, would be directed to, within 60 days of enactment, issue regulatory guidance “on preparedness, flexibility, relief, and investor protection for investors in pandemics and major disasters, including relevant disclosures.” The commission would also be directed to conduct pandemic preparedness testing every five years to determine how regulated entities will be able to respond to a pandemic or major disaster.
The House Democratic package conflicts sharply with the Senate GOP’s vision, an updated version of which was rolled out on March 22.
Notably absent from the House package is a delay to the FASB’s loan-loss rules, despite some influential House Democrats supporting such a move.
Under the Senate’s Coronavirus Aid, Relief and Economic Security (CARES) Act, the FASB’s Current Expected Credit Loss (CECL) standard would be postponed through the end of the year, or until the end of the COVID-19 crisis.
The insertion of the CECL delay is the latest in a string of Republican efforts on Capitol Hill to postpone the rules amid the mounting economic turmoil, and likely recession, brought about by the pandemic. Critics of the FASB’s standard, issued in mid-2016 in Accounting Standards Update (ASU) No. 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, warn the changes will force banks to needlessly hold more capital and pull back on lending in a crisis, when borrowers most need the funds.
Under the CARES Act provision no bank would be required to comply with the requirements either until December 31, or until the Secretary of Health and Human Services declares an end to the public health emergency, whichever is sooner.
The standard, widely seen as the FASB’s most significant and far-reaching response to the 2008 financial crisis, addresses criticisms that banks were far too slow to recognize souring loans on their balance sheets. The rules take effect this year for large public companies, but smaller public companies and private companies have until 2023 to adopt the changes.
Under the credit loss standard, banks and other financial entities will be required to forecast into the foreseeable future to predict losses over the life of a loan and then immediately book those losses.
For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.
Additional analysis of the credit loss standard can be found at Accounting and Auditing Update Service[AAUS] No. 2016-29 and SEC Accounting and Reporting Update Service[SARU] No. 2016-34 (July 2016): Special Report: Accounting for Credit Losses on Certain Financial Assets—An Explanation and Analysis of Accounting Standards Update No. 2016-13.