Corp Fin Disclosure Guidance: Topic No. 9 Coronavirus

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

[On March 25, 2020], the staff of Corp Fin issued Disclosure Guidance Topic No. 9, which offers the staff’s views regarding disclosure considerations, trading on material inside information and reporting financial results in the context of COVID-19 and related uncertainties. The guidance includes a valuable series of questions designed to help companies assess, and to stimulate effective disclosure regarding, the impact of the coronavirus. As always these days, the guidance makes clear that it represents only the views of the staff, is not binding and has no legal force or effect.

In the guidance, the staff indicates that it is continuing to monitor how companies are reporting the impact of COVID-19 and acknowledges that reporting companies view timely and robust disclosure as “essential to functioning markets and that they want to file periodic and current reports in a timely manner, notwithstanding the available relief.” Nevertheless, the staff recognizes that the uncertainties associated with COVID-19 make its effect on specific companies difficult to predict and, in many circumstances, the impact is beyond a company’s control and knowledge. Still, “the effects COVID-19 has had on a company, what management expects its future impact will be, how management is responding to evolving events, and how it is planning for COVID-19-related uncertainties can be material to investment and voting decisions.”

Disclosure of COVID-19 risks and effects may be required or appropriate in MD&A, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements or other sections, whether or not in response to a specific line item requirement.

Disclosure regarding the “evolving impact of COVID-19”

The staff emphasizes that disclosure about the risks, management responses and evolving effects of COVID-19 entails a facts-and-circumstances analysis, and any disclosure should be tailored specifically to the company’s situation. In particular, the staff urges companies “to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management, and [advises] that companies proactively revise and update disclosures as facts and circumstances change.” In addition, the staff reminds companies, when disclosing forward-looking information that may be based on assumptions and expectations regarding future events, to make use of the safe harbors for forward-looking information in Section 27A of the Securities Act and Section 21E of the Exchange Act to the extent available.

The staff has developed a very helpful set of questions—which the staff characterizes as “illustrative but not exhaustive”—for companies to consider in this context, copied below in their entirety:

  • “How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition? Do you expect that COVID-19 will impact future operations differently than how it affected the current period?
  • How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency? Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk. Do you expect to disclose or incur any material COVID-19-related contingencies?
  • How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S GAAP or IFRS?
  • Do you anticipate any material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
  • Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures? If so, what changes in your controls have occurred during the current period that materially affect or are reasonably likely to materially affect your internal control over financial reporting? What challenges do you anticipate in your ability to maintain these systems and controls?
  • Have you experienced challenges in implementing your business continuity plans or do you foresee requiring material expenditures to do so? Do you face any material resource constraints in implementing these plans?
  • Do you expect COVID-19 to materially affect the demand for your products or services?
  • Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services? Do you expect the anticipated impact of COVID-19 to materially change the relationship between costs and revenues?
  • Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
  • Are travel restrictions and border closures expected to have a material impact on your ability to operate and achieve your business goals?”

Trading on material nonpublic information

Once again, the staff has taken the opportunity to remind us that neither the company nor insiders should be trading on the basis of material nonpublic about COVID-19 and related risks. Companies should also take steps to avoid selective disclosures by disseminating the information broadly to the public. The staff also urges companies to consider whether they “may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate.”

Reporting financial Results

In the guidance, the staff recognizes that COVID-19 creates a number of uncertainties, such as unexpected nonrecurring charges and expenses, as well as novel or complex accounting issues that that could require substantial time to resolve—all of which is likely to make it harder for companies to complete the work necessary to file their periodic reports on a timely basis. The staff encourages companies to plan ahead and engage with any necessary expert consultants—for example, consultants to help determine impairment of goodwill or other assets—as promptly as practicable.

The staff also raises the issue of non-GAAP financial measures and key performance measures in the context of COVID-19. Specifically, the staff advises that companies using NGFMs or KPIs “to adjust for or explain the impact of COVID-19” should address “why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.”

To the extent that a GAAP measure is not available at the time of the earnings release because of potential COVID-19-related adjustments that have not yet been nailed down, the staff “would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.” For example, a company intending to disclose EBITDA on an earnings call could reconcile that NGFM “to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount, or its reasonable estimate of a range of GAAP earnings. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges.” The staff also reminds us of the NGFM equal-or-greater prominence requirement. (See this PubCo post.) In periodic reports or other filings that must include GAAP financial statements, however, companies should reconcile to GAAP results and not include provisional amounts or a range of estimated results.

The staff also advises that, where the company presents a NGFM not reconciled to GAAP in reliance on the staff’s position, the company

“should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors. We remind companies that we do not believe it is appropriate for a company to present non-GAAP financial measures or metrics for the sole purpose of presenting a more favorable view of the company. Rather we believe companies should use non-GAAP financial measures and performance metrics for the purpose of sharing with investors how management and the Board are analyzing the current and potential impact of COVID-19 on the company’s financial condition and operating results. If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting. We similarly understand that companies may consider presenting metrics related to COVID-19, or changing the method by which it calculates a metric as a result of COVID-19. In these cases, we remind companies of the principles explained in recent Commission guidance related to metrics.“


The SEC guidance the staff invokes above was issued in February, focusing on the disclosure of KPIs and other metrics in MD&A. In the guidance, the SEC cautioned that, because prior guidance instructs a company to “provide a narrative that enables investors to see a company ‘through the eyes of management,’ so these metrics should not deviate materially from metrics used to manage operations or make strategic decisions.” [Emphasis added.] Depending on the facts and circumstances, when a company presents KPIs, the SEC expects to see:

  • “A clear definition of the metric and how it is calculated;
  • A statement indicating the reasons why the metric provides useful information to investors; and
  • A statement indicating how management uses the metric in managing or monitoring the performance of the business.

The company should also consider whether there are estimates or assumptions underlying the metric or its calculation, and whether disclosure of such items is necessary for the metric not to be materially misleading.”

If a company changes the method of calculation or presentation, the guidance advises that the company

“should consider the need to disclose, to the extent material:

(1) the differences in the way the metric is calculated or presented compared to prior periods,

(2) the reasons for such changes,

(3) the effects of any such change on the amounts or other information being disclosed and on amounts or other information previously reported, and

(4) such other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects.”

The guidance also recommends that companies consider the need to “recast prior metrics to conform to the current presentation and place the current disclosure in an appropriate context,” depending on the significance of the change.

The guidance also reminds us of the importance of maintaining effective disclosure controls and procedures in connection with the “material key performance indicators or metrics that are derived from the company’s own information. When key performance indicators and metrics are material to an investment or voting decision, the company should consider whether it has effective controls and procedures in place to process information related to the disclosure of such items to ensure consistency as well as accuracy.” (See this PubCo post.)

Both comments and trackbacks are currently closed.