By Soyoung Ho
Public companies’ disclosures related to the impact of COVID-19 in the past three quarters have been by and large “pretty good,” an SEC staff said during a recent accounting conference. And because the pandemic is continuing, the SEC staff expects companies to provide updated disclosures.
“As you continue to develop your disclosure, you need to keep in mind that assessing the effects of COVID-19 and related risks will depend on a company’s facts and circumstances,” Patrick Gilmore, deputy chief accountant in the SEC’s Division of Corporation Finance (CorpFin), said at the AICPA’s Conference on Current SEC and PCAOB Developments on December 8, 2020. “As a result, the disclosure about these risks and effects should be specific to a company’s situation and should be updated and continue to evolve over time.”
While reviewing company filings, the staff may issue a comment letter if reviewers come across boilerplate disclosure. CorpFin issues staff comment letters when they believe the disclosures are not sufficient or appropriate.
The division earlier on published interpretive guidance for companies to make sure investors get useful information during the pandemic. Authorities’ effort to contain the spread of the novel coronavirus led to suspension of many economic activities initially, putting unprecedented financial and operational strain on businesses. But the disclosure guidance will continue to be helpful for year-end reporting as the effects of COVID-19 will last for some time to come.
In particular, CorpFin in late March published Coronavirus (COVID-19), CF Disclosure Guidance: Topic No. 9. This is not formal commission regulation but staff’s views about best disclosure practices. (See SEC Staff Outlines Disclosure Considerations for Public Companies in Light of COVID-19 Challenges in the March 26, 2020, edition of Accounting & Compliance Alert.)
Then in June, as companies were preparing to report second quarter results CorpFin published additional staff interpretive guidance, Coronavirus (COVID-19) — Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources, CF Disclosure Guidance: Topic No. 9A. And it supplements Topic No. 9 issued in March. (SEC Staff Outlines Disclosure Considerations for Public Company Q2 Reporting in the June 25, 2020, edition of ACA.)
What Staff Saw and Expects
Overall, the disclosures in the past three quarters have been good, but “we’ve seen some not so good disclosures,” Gilmore said.
In the meantime, companies have taken different approaches to how they disclose the effects of COVID-19 and the related risks.
“We’ve seen some companies take a traditional approach and provide the discussion of COVID-19 impacts in each section as part of the document,” Gilmore said. “We’ve also seen companies take a different approach and have one section dedicated to the impact COVID had on the company. Either way is fine.”
Gilmore also said that SEC staff have noticed that companies read the staff guidance and tried to apply it in their filings.
The staff has also noticed that some companies that were adversely impacted by the pandemic discussed the short-term steps in dealing with it, he said. For example, companies drew down debt from new or existing credit facility to inject cash. However, some of these companies did not disclose how they considered the long-term impact of COVID-19, and how they thought some of these steps would play out going forward.
“For example, if you have that company that drew down debt…, how do they expect to pay that back in the future, is it through normal operation? Or do they anticipate having to refinance that in the future?” Gilmore explained. “Because the pandemic is continuing, at year-end we expect registrants’ to update liquidity disclosures discuss the impact it’s had or will have on their business operations on liquidity.”
In addition, the staff observed that some companies provided certain information—sometimes lengthy discussions—with analysts during quarterly earnings calls. Information discussed during earnings calls can be outside regulatory filings.
However, “one thing to think about is if the information is important enough to discuss in earnings calls, maybe that information should be included in the filings as well,” Gilmore said.
This article originally appeared in the December 22, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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