SEC Division of Corporation Finance Issues Additional Guidance on COVID-19 Disclosures in Disclosure Guidance Topic 9A

On June 23, 2020, the SEC’s Division of Corporation Finance issued Disclosure Guidance Topic 9A – Coronavirus (COVID-19) – Disclosure Considerations Regarding Operations, Liquidity and Capital Resources which provides “additional views” of  the Division regarding operations, liquidity, and capital resources disclosures companies should consider with respect to business and market disruptions related to COVID-19. The new guidance supplements Topic 9 issued in March 2020 as discussed in our March 26, 2020 advisory. The new guidance encourages companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management and to proactively revise and update disclosures as facts and circumstances change.

Building on the list of possible disclosure considerations described in Topic No. 9, the new guidance provides several questions companies should consider as they prepare reports for the quarter ending June 30, 2020:

• What are the material operational challenges that management and the Board of Directors are monitoring and evaluating? How and to what extent have you altered your operations, such as implementing health and safety policies for employees, contractors, and customers, to deal with these challenges, including challenges related to employees returning to the workplace?
• How is your overall liquidity position and outlook evolving? Are any decreases in cash flow from operations having a material impact on your liquidity position and outlook?
• Have you accessed revolving lines of credit or raised capital in the public or private markets to address your liquidity needs?
• Have COVID-19 related impacts affected your ability to access your traditional funding sources on the same or reasonably similar terms as were available to you in recent periods?
• Are you at material risk of not meeting covenants in your credit and other agreements?
• If you include metrics, such as cash burn rate or daily cash use, in your disclosures, are you providing a clear definition of the metric and explaining how management uses the metric in managing or monitoring liquidity?
• Have you reduced your capital expenditures and if so, how? Have you reduced or suspended share repurchase programs or dividend payments? Have you ceased any material business operations or disposed of a material asset or line of business? Have you materially reduced or increased your human capital resource expenditures? Are any of these measures temporary in nature, and if so, how long do you expect to maintain them?
• Are you able to timely service your debt and other obligations?
• Have you altered terms with your customers, such as extended payment terms or refund periods, and if so, how have those actions materially affected your financial condition or liquidity?
• Are you relying on supplier finance programs, otherwise referred to as supply chain financing, structured trade payables, reverse factoring, or vendor financing, to manage your cash flow?
• Have you assessed the impact material events that occurred after the end of the reporting period, but before the financial statements were issued, have had or are reasonably likely to have on your liquidity and capital resources and considered whether disclosure of subsequent events in the financial statements and known trends or uncertainties in MD&A is required?

The new guidance also includes discussion of the impact of CARES Act assistance on companies and going concern considerations. Related questions to consider include:

• How does a loan impact your financial condition, liquidity and capital resources? What are the material terms and conditions of any assistance you received, and do you anticipate being able to comply with them? Do those terms and conditions limit your ability to seek other sources of financing or affect your cost of capital?
• Are you taking advantage of any recent tax relief, and if so, how does that relief impact your short- and long-term liquidity? Do you expect a material tax refund for prior periods?
• Does the assistance involve new material accounting estimates or judgments that should be disclosed or materially change a prior critical accounting estimate?
• Are there conditions and events that give rise to the substantial doubt about the company’s ability to continue as a going concern?

Along with the Division’s new guidance, the SEC’s Chief Accountant, Sagar Teotia issued a statement also on June 23, 2020 stressing the importance of high-quality financial reporting during COVID-19.