First Quarter Disclosure Trends and Second Quarter Disclosure Expectations

Pamela L. Marcogliese and Michael Levitt are partners and Amy Fisher is a law clerk at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum.

The coronavirus pandemic (COVID-19) has had a significant impact on many if not all US publicly-traded companies. Whether companies suffered breaks in their supply chains, closures of their sites, or faltering demand as consumers were forced to stay at home, companies endured disruptions that, in some cases, materially impacted their results. Yet, despite this unprecedented dislocation, even when the SEC provided a 45-day grace period for making periodic filings, including 10-Q filings, we found that most S&P 500 companies filed their SEC reports on time.

We outline below some of the notable COVID-19 disclosure trends from the most recent quarterly reports of S&P 500 companies and provide recommendations on what companies should consider when preparing this quarter’s SEC disclosure.

SEC guidance

On March 25, 2020, the Division of Corporation Finance issued guidance on how companies should disclose the evolving business risks affecting several areas of disclosure. On April 8, 2020, the Division urged companies to provide as much information as practicable about their current financial and operating status and future operational and financial planning. It underscored the importance of providing more forward-looking information and reminded companies to carefully craft forward-looking statement safe harbors that would help to protect them from liability.

On June 23, 2020, the Division updated its guidance, focusing on the effects of the pandemic on a company’s operations and liquidity, the short- and long-term impact of federal relief and the company’s ability to continue as a going concern. The SEC noted that, while many companies had disclosed the impact of COVID-19 in their earnings or other press releases, they should evaluate whether that same disclosure should also be included in their SEC filings. Also on June 23, 2020, the SEC’s Chief Accountant reminded companies that if any changes materially affect, or are reasonably likely to materially affect, an entity’s internal control over financial reporting, such change must be disclosed in the 10-Q for the fiscal quarter in which it occurred. These changes may include consideration of how controls operate or can be tested and if there is any change in the risk of the control operating effectively in a telework environment.

Business section

The SEC’s March 25, 2020 guidance reminded companies to consider disclosing changes in demand for products and services, supply chain and distribution interruptions, impacts on operations due to constraints on employees and productivity, and effects of travel restrictions and border closures. Companies generally included this disclosure in their 10-Q filings in an overview section or within their Management Discussion and Analysis section (MD&A). Key disclosures included:

  • Changes to a company’s organization to match the breadth and scope of activity, including furloughing personnel, cutting salaries, lowering headcount, and reducing discretionary spending such as travel and closing their facilities;
  • Mitigation strategies, such as focusing on curbside pick-up and increased home delivery options, online activities, and implementing drastic cost saving measures such as suspending rent payments for their stores;
  • Reductions in directors’ and executive officers’ cash compensation; and
  • Reductions in 2020 expected capital expenditures.

Risk factors and forward looking statement safe harbors

The SEC’s March 25, 2020 guidance advised companies that discussion of COVID-19 risks and effects may be necessary in their risk factors, MD&A, the business section, legal proceedings, disclosure controls and procedures, internal control over financial reporting and their financial statements. A review of Fortune 100 companies by Ernst & Young LLP (EY) noted that 90% of those companies included at least one new COVID-19 related risk factor in their 10-Q filings between February 1 and May 31, 2020. But companies varied the ways they presented the impact COVID-19 had, and will continue to have, on their operations:

  • EY found that 16% of Fortune 100 companies noted the risks associated with COVID-19 within previously disclosed risk factors, such as pre-existing risk factors about pandemics or about the impact of the global economy on their business. These companies referenced COVID‑19 impacts to existing risks such as those related to IT and security, damage to reputation, loss of customers, renewal of contracts, regulatory change, accuracy of pricing and ability to hire and onboard new employees.
  • EY further noted that approximately 75% of the Fortune 100 companies identified one new risk factor generally addressing a variety of COVID‑19 related risks such as impacts on supply chains, adverse economic conditions, drops in commodity prices, impacts on customers and adjacent industries, risks to liquidity and impacts on the workforce.


Pursuant to Item 303 of Regulation S-K, companies are required to describe, through the eyes of management, the factors that drove results for the recently completed accounting period. The first comment letters that the SEC issued after the start of the pandemic focused on whether companies had sufficiently described the impact of the pandemic. Although generally companies reported their results in their usual fashion, some companies isolated the estimated COVID-19 losses from their operations to give investors a more thorough understanding of the impact of COVID-19 on their business. Other companies provided qualitative rather than quantitative disclosure when isolating COVID-19 from their results. Some companies provided this information in their earnings releases but chose not to include the same level of disclosure in their 10-Q filings.

In addition, pursuant to Item 303(a)(3)(ii) of Regulation S-K, companies are required to disclose “known trends and uncertainties.” The SEC cautioned that historical disclosure might be substantially less relevant and that investors and analysts were looking for additional forward-looking information. In part this was accentuated because, for many companies, first quarter historical results would not fully reflect the impact of the pandemic, or did so only for a small portion of the quarter.

The SEC urged companies to provide additional forward-looking information which led many companies to include (or add to) an overview section in their MD&A that described holistically the impact of the pandemic on the quarter’s results. Often, this section also described the areas where the company continued to see impacts and expected these impacts to continue after the filing of the SEC periodic report. For example, companies described how the outbreak could affect industry, supply and demand trends in the market, including sharp declines because of regulatory and organizational mandates (e.g. shelter in place mandates, travel restrictions, non-essential business and school closures) and voluntary changes in consumer behavior (e.g. social distancing). Some companies described the fluidity within the market, stating that they believed the economy would be challenged for some time, and a few companies went so far as to state that the second quarter is likely to be the most uncertain and disruptive quarter their industry has ever seen.

As part of MD&A, companies are also required to describe the impact on their liquidity position and changes in their cash flows. The SEC’s March 25 guidance advised companies to consider, among other things:

  1. whether their cost of or access to capital and funding sources, such as revolving credit facilities or other sources, changed or is reasonably likely to change;
  2. whether sources or uses of cash otherwise have been materially impacted;
  3. whether there was material uncertainty about the company’s ongoing ability to meet the covenants of its credit agreements; and
  4. if a material liquidity deficiency has been identified, what course of action the company has taken or proposed to take to remedy the deficiency.

In this section, many companies disclosed that they had determined to lower or not pay their dividends, suspended share repurchase programs, implemented certain cost reduction initiatives, reduced planned projects and capital expenditures, accessed government aid programs and increased liquidity by executing new loan facilities and drawing down on existing credit facilities.

Internal controls and disclosure controls

Under Item 307 of Regulation S-K, companies are required to disclose any change in the company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting. Under Item 308 of Regulation S-K relating to disclosure controls, companies are required to test the effectiveness of their disclosure controls on a quarterly basis and report on their conclusions in their quarterly report. Based on our review, for the first quarter, companies generally did not report changes in their controls.

Financial statements

In its March 25, 2020 guidance, the SEC asked companies to consider if they anticipated any changes in judgments in determining fair value of assets or material impairments (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities) as a result of COVID-19. Based on our review , a number of companies disclosed that they were required to perform an interim goodwill impairment test, particularly in certain industries that were disproportionately impacted.

Earnings guidance

In an era of severe volatility affecting expectations for quarterly and annual results, companies that issued earnings and other guidance were required to consider whether to withdraw or adjust their guidance as the pandemic continued. Through June 25, 2020, approximately 218 companies in the S&P 500 have withdrawn guidance, approximately 154 have lowered all or some of their guidance and approximately 28 have increased their guidance, according to data compiled by Dow Jones Newswire. In the absence of specific numerical guidance, companies sometimes relied instead on other means to guide their investors. However, such information was most typically disclosed in press releases and earning calls rather than in their 10-Q filings.

Non-GAAP financial measures

The presentation of non-GAAP measures has been a key area of focus for the SEC following the emergence of COVID-19. In its March 25, 2020 guidance, the SEC stated that to the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it would be appropriate to highlight “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.”

Most companies did not include COVID-19 related adjustments in connection with the presentation of non-GAAP financial measures in the first quarter. For the companies that did include COVID-19 adjustments in their non-GAAP financial measures, these adjustments typically related to changes in compensation, costs relating to supporting new working conditions, such as social distancing measures, PPE and additional cleaning supplies, as well  as restructuring costs incurred in connection with measures related to COVID-19.

Recommendations for Q2 SEC filings

With event-driven litigation on the rise, companies will need to pay particular attention to their disclosure to avoid litigation that often follows the disclosure of bad news and the related stock drop. But in an unstable and challenging environment, where the SEC and investors are more focused than ever on forward-looking information, the risk is even higher.

Companies should pay particular attention to the following considerations as they prepare their second quarter disclosures:

  • SEC guidance. Companies should follow the SEC’s guidance from March, April and June 2020 and the recommendations of the SEC Chief Accountant.
  • Forward-looking statement warnings. As companies provide more forward-looking information, they should review their forward looking statement safe harbor language to ensure that it is updated and appropriately tailored to reflect changing circumstances.
  • Risk factors. Companies should regularly update their risk factors as more COVID-19 related risks emerge. Companies should be mindful not to describe a risk as an event that may happen, if it has already materialized.
  • MD&A. Companies should ensure that their MD&A describes the impact of COVID-19 on the company’s results, as well as any “known trends and uncertainties” of which management may be aware but that are not yet reflected in the company’s results. To this end, companies should focus on the drafting of the MD&A overview and the list of factors impacting its business.
  • Liquidity. Companies should carefully review the liquidity section of their MD&A, especially if new sources of financing have been accessed, new uses of cash are necessary or changes in capital expenditures have occurred or are expected.
  • Disclosure and internal controls. Companies must assess their disclosure and internal controls as working arrangements continue to evolve. Material changes to internal controls made during a quarter must be disclosed in the Form 10-Q.
  • Earnings release information. Companies should ensure that all material information contained in their earnings release is also included in the corresponding  10-Q filing.
  • Guidance. Companies that withdrew guidance due to the current economic uncertainty but are thinking about reinstating it must be especially cautious in this fluid environment. In particular, if companies reinstate guidance, they should be clear about the assumptions that underlie their new guidance.
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