COVID-19 and Your 10-Q: The SEC Throws a Lifeline
As if it wasn't hard enough to write a 10-Q, you've been working from home surrounded by kids, pets, and Netflix—and we now have to factor in COVID-19 into our SEC disclosures.
There's no need to panic, but you definitely want to pay attention. (Go ahead and pause The Office. Jim and Dwight will wait.)
As responses to COVID-19 evolve rapidly and with future effects still uncertain, the U.S. Securities and Exchange Commission is closely watching how companies are reporting the pandemic's impacts on their results and future guidance.
Fortunately, the SEC has provided a road map to navigate these uncertainties, so you can keep your disclosures timely, robust, and complete. SEC Chairman Jay Clayton and William Hinman, Director of the Division of Corporation Finance, then issued a statement on April 8 with even more detail for companies as they issue earnings releases and hold earnings calls.
It's not too common for the SEC to release issue-specific guidance, so take advantage of it, and follow it closely.
What to consider
Here's what stuck out to me in CF Disclosure Guidance: Topic No. 9 and the April 8 statement:
1. Like stink on a skunk, COVID-19 disclosures may be pervasive
The SEC has said its disclosure requirements can apply to a broad range of evolving risks. Within your 10-Q, risks like COVID-19 and the likely effects of the pandemic may need to make their way into your management discussion and analysis (MD&A), risk factors, legal proceedings, financial statements, and internal controls over financial reporting, for starters.
Now, here's the tricky part. No one can predict how long the new coronavirus will turn our lives upside down or how federal, state, and local responses will change. The timing of the pandemic will likely affect some of your accounting determinations and your SEC disclosures, so keep an eye out for new information on how the pandemic is impacting the economy, both today and in the future. Fitch Ratings said in early April it expected a short, severe global recession with recovery beginning in the third quarter, but it won't be nearly enough to pull world real GDP growth into positive territory for 2020 overall.
Chairman Clayton and William Hinman's statement April 8 notes the deep contraction in the economy, but also the emerging consensus that efforts to fight COVID-19 could allow for incremental activity to foster the economy:
"Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress."
Bonus tip: If you're a Workiva user, you can link language that you use to describe trends and uncertainties in your MD&A to other sections in your 10-Q that mention them, as well as to drafts of your news release and earnings call script, for consistency. If you need to make a late change, just update at the source, and it will automatically update across all linked instances.
You can also use Workiva to leave comments for your co-workers, set up tasks for them to complete, so they know they need to approve or respond to something, and control who can see and edit sensitive information.
2. Let's do the numbers
If you're lucky, COVID-19 has had minimal impacts on your financial condition, results, and operations, but chances are you and your customers have been affected somehow.
You'll want to pay careful attention to these impacts, how they differed from comparable periods, and how you expect them to influence your company in the future. Don't forget to include any hits to your capital and financial resources, including your overall liquidity position and outlook.
3. What is fair value anymore?
It's likely that COVID-19 will have significant impacts on judgments used to determine the fair value of assets, including potential triggering events or impairments to goodwill, intangible assets, long-lived assets, right of use assets, or investment securities. You may need to increase allowances for credit losses, restructuring charges, or for other changes in accounting judgments if they might be material.
Bonus tip: If you are a Workiva user, you can link these values across internal reports, board presentations, and external reports for consistency. Linking can also help you update the numbers across all linked instances automatically if you need to change them at the last minute.
4. Keep it under control
Think through the impacts of COVID-19 on your business continuity plan—did your BCP work? The SEC suggests considering the impact of remote work arrangements on operations, financial reporting systems, and internal controls.
If you are already able to maintain your internal control and audit programs remotely and can manage certifications, approvals, and sign-offs digitally, maybe that's worth disclosing, too.
5. Don’t keep it secret, but keep it safe
Obviously, many of the considerations described above will inherently involve forward-looking information based on assumptions regarding future events. Be sure to take advantage of the safe harbors provided by the SEC in Section 27A of the Securities Act and Section 21E of the Exchange Act. You will want to consult with your securities counsel to be sure you're doing this correctly.
6. Mind the GAAP
If your earnings release precedes your 10-Q or 10-K, you may need to disclose non-GAAP measures without having a finalized GAAP measure to compare it to. In its guidance, the SEC said it is OK if you compare non-GAAP measures to provisional GAAP measures (or a range) under certain circumstances. Check out the SEC's guidance and the full April 8 statement from Chairman Clayton and William Hinman for all the details.
The idea is to make sure investors are viewing the company, your results, and the impacts of COVID-19 on the business through the same lens as you and your board of directors.
Keep checking workiva.com for more help for the new normal, including short videos, blog posts, a spot to submit your questions, and free AuditNet templates to help you respond to COVID-19.
About the Author
Steve is Senior Director of Product Marketing and Accounting Industry Principal at Workiva. Previously, Steve served as an accounting leader in multiple roles including Vice President and Controller for Backcountry.com, a private equity owned, online retailer of outdoor products, and as the Director of SEC Reporting for Overstock.com (NASDAQ: OSTK), a $2 billion revenue, online retailer of home goods and blockchain technology company. His experience includes multiple acquisitions, debt offerings, an IPO, and the world’s first digital debt and equity offering (by Overstock). Steve is also a former member of the US XBRL Data Quality Committee.