Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources
On June 23, 2020, the SEC’s Division of Corporation Finance (the “Staff”) issued Disclosure Guidance: Topic 9A (the “Guidance”), providing guidance on operations, liquidity, and capital resources disclosure that companies should consider in light of the COVID-19 pandemic. The Guidance supplements the Staff’s previous guidance on the need to provide and proactively update disclosures to enable investors to evaluate the current and expected impacts of COVID-19 (reported on here). The updated guidance continues to “encourage companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management” and to update these disclosures as the pandemic evolves.
Operations, Liquidity, and Capital Resources Disclosure
In acknowledgment of the diverse range of operational adjustments and financing activities companies have undertaken in response to the effects of COVID-19 and the potential for these changes to be important to an investment or voting decision, the Guidance suggests that companies should provide robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment, especially to the extent efforts present new risks or uncertainties to their business. The Guidance encourages companies to consider a broad range of questions when crafting disclosures to give investors a complete picture of financial condition, liquidity, and capital resources in light of the pandemic, including:
- How have changes to the company’s operations in response to material operational challenges due to the pandemic impacted financial condition and short -and long-term liquidity?
- How is the company’s overall liquidity position and outlook evolving in light of the pandemic’s impact on revenues and cash flow?
- How has the pandemic impacted the company’s ability to access necessary funds in the public and private markets, and how do the terms of this funding compare with pre-pandemic terms?
- Has the company accessed revolving lines of credit or raised capital in public or private markets to meet its liquidity needs? Is the company at material risk of default under its credit and other agreements, and has it taken advantage of available deferrals and other concessions or modified contract terms?
- How have any reduction in capital expenditures, share repurchase programs, or dividend payments or cut back in operations impacted revenues?
- How have any of the company’s cash flow management strategies (e.g., vendor finance or reverse factoring) impacted the balance sheet, statement of cash flows, or short- and long-term liquidity?
- Have any material events occurring after the end of the reporting period, but before the financial statements are issued, had a material impact on the company’s liquidity and capital resources?
The Staff notes that while they have observed companies making some of these disclosures in earnings releases, companies should evaluate whether any of the disclosed information should also be included in MD&A due to its potential materiality.
CARES Act Disclosure
The Guidance encourages companies who have received financial assistance such as loans or tax relief under the CARES Act to consider the short- and long-term impact of such assistance on their financial condition, results of operations, liquidity, and capital resources, including any new material accounting estimates or judgments.
Ability to Continue as a Going Concern
In the Guidance, the Staff recommends that companies consider whether conditions and events, as a whole, raise substantial doubt about the company’s ability to meet its obligations as they become due within a year of the issuance of their financial statements. If there is substantial doubt, companies are encouraged to consider providing disclosure in the MD&A about the conditions and events that give rise to such doubt, including any default on outstanding obligations, labor challenges, and plans to address these challenges.
Closing Thoughts
The pandemic continues to bring uncertainties to public companies and markets. The Guidance, together with the Staff’s earlier related guidance, provides a good starting point rather than a complete roadmap for COVID-19–related disclosure. Companies should remain vigilant in understanding the impacts of the rapidly evolving pandemic on their financial condition and prospects to ensure that investors receive timely information that is material to their investment and voting decisions.
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