Earnings Season Primer: 4 SEC Recommendations on Additional COVID-Related Disclosures

Written By Elizabeth Saunders, Partner

July 7, 2020

In case you missed it, the SEC held a virtual roundtable last week, in which its participants provided high-level recommendations for additional COVID-19 disclosures companies should be mindful of this earnings season. Here are our four takeaways.

  1. Communicate overall impact of the pandemic on the business. This was a far-reaching decision and clearly aimed at making sure the impacts of COVID-19 are integrated throughout earnings disclosures, not just an isolated statement.
    • Additional recommended disclosures from the SEC included:
      • Outline the impact to the company’s business operations as a result of the COVID-19 pandemic, being careful to avoid a one-size-fits-all approach. Additionally, the SEC recommended companies provide a series of qualitative disclosures regarding the operational challenges caused by COVID-19 and how the company is overcoming them.
      • Describe the pandemic’s impact on the company’s consumers and competitors. This is meant to be both a current and future demand discussion, and also an overview of any financial hardships public competitors have publicly announced.
      • Highlight the pandemic’s impact on the company’s supply chain. The SEC specifically recommended a discussion of travel restrictions’ impact on both the supplier network and the company’s own employee travel policies.
      • Consider providing a monthly breakdown of the second quarter, as well as a summary of the expectations, cash flow, and results for each month. Needless to say, we were floored by this recommendation. Our suggestion: we believe companies should provide an overview of monthly trend information including changes in demand, reductions in expenses, and implications to cash flow and liquidity.
  2. Be transparent and detailed around liquidity. Similar to last quarter, financial strength and flexibility are expected to be critical topics for investors – meaning, the more information, the better.
    • Additional recommended disclosures from the SEC included:
      • Provide detailed and forward-looking guidance on the company’s liquidity position, including its expected cash burn and upcoming planned capital expenditures. The SEC recommended including a best-, middle-, and worst-case liquidity scenario for companies with the potential for significant liquidity issues. They also recommended the disclosure of remediation plans and to the extent it differs greatly to prior quarters, a detailed use of cash statement for the second quarter.
      • Discuss the amount of liquidity currently available under the company’s existing financing facilities, the likelihood of tripping a financial covenant, and any ongoing discussion to loosen these restrictions.
      • Disclose cash received from government programs globally related to the pandemic, and whether these are ongoing or one-time cash payments.
  3. Highlight human capital adjustments made in response to the pandemic, as well as any go-forward plans under consideration. This quarter’s discussion is recommended to go one layer deeper in human capital cost actions, while also communicating how and when the company plans to return to normal.
    • Additional recommended disclosures from the SEC included:
      • Articulate process, rationale, timing, and financial implications of executive compensation cuts and workforce reductions.
      • Describe costs and policies related to the work from home transition, and specifically identify any challenges experienced as a result of this transition. The SEC also recommended providing estimated costs and timing for employees to return to the workplace safely.
      • In a nod to racial unrest in the U.S. and beyond, the SEC recommended disclosing any impact this might be having on company operations, as well as providing the company’s  racial and gender diversity disclosure that includes a description of applicable hiring practices. Our suggestion: We don’t view earnings materials as being the best placement for this information unless the company has been significantly affected by these activities in the quarter. A reference to these policies in the proxy statement would be adequate.
  4. Have a transparent discussion on outlook, including a wide range of outcomes. This section was extremely high level and no clear guidance was provided about the extent of detail by outcome, whether ranges were acceptable, and to what extent supporting assumptions needed to be included in this discussion. Division of Corporate Finance Director Hinman did indicate, however, the SEC would consider providing more detailed examples and guidance on this expected disclosure.

Based on these extensive recommendations, it is clear that the SEC is asking companies to amplify corporate disclosures related to the pandemic’s impact on current and future operations, liquidity, and outlook in light of current market conditions. Additionally, considering the SEC pronounced human capital disclosures as the next ESG topic for which they will provide greater rules and expectations, we believe the addition of human capital is an important topic to include this earnings season and a harbinger of what is soon to come.

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