This blog was first published on April 14, 2020 and updated on September 7, 2021.
Companies, investors, analysts, and regulators continue to closely monitor the financial issues caused by COVID-19, especially as they relate to the reporting of financial results. The economic impacts of the coronavirus have made producing comprehensive, forward-looking financial and operational reports more challenging than ever.
To alleviate these difficulties, the Securities & Exchange Commission (SEC) has continuously issued guidance for public companies since the start of the pandemic. These statements emphasize the ongoing importance of continuing to provide high-quality financial information that investors and capital markets can rely on.
In this blog, we’ll provide an overview of the importance of high-quality financial reporting and disclosure in the age of COVID-19. Our goal is to provide you with relevant information that will help you reap the benefits of high-quality financial reporting, despite the turbulence caused by the coronavirus.
What is Financial Disclosure?
Financial disclosure is the process of providing the public with the information they need to make informed investment decisions. Disclosed details should reflect your company’s positive and negative news, operational details, and any data that impacts your business. The end goal of disclosure is to provide the public with equal access to the same set of facts as company insiders.
Your management team is responsible for implementing internal control over financial reporting (ICFR) that provides reasonable assurance regarding the reliability of financial reporting. Additionally, you should provide confirmation that financial statements for external purposes are prepared in accordance with generally-accepted accounting principles (GAAP).
The Sarbanes-Oxley Act (2002)
The Sarbanes-Oxley (or SOX) Act expanded public company disclosure requirements and how the federal government oversees these stipulations. This includes corporate responsibility, increased criminal punishment, accounting regulation, and new protections.
The SEC requires all publicly-traded companies to issue two disclosure-related annual reports for their own records and company shareholders, known as 10-Ks. These documents must include both a prospectus and material information about your competitive environment.
The three most important parts of the Sarbanes-Oxley Act are Sections 302, 404, and 802. We’ll take a closer look at each of these below.
This requires senior management to certify in writing that your financial statements comply with SEC disclosure requirements and fairly present your operations and financial condition.
This requires your management and auditors to establish internal controls and reporting methods to ensure the adequacy of those controls.
This implements three new rules that affect record keeping: destruction and falsification of records, retention period for storing records, and guidelines for specific records that companies must store.
Forward-Looking Disclosure is More Important Than Ever
Unfortunately, the effects of and response to COVID-19 have increased public market volatility and uncertainty. And the importance of high-quality financial reporting is more relevant than ever because it helps investors and analysts gauge value and estimate future performance. As a result, the SEC has focused on facilitating market function and preserving market integrity while providing guidance and relief to public companies affected by COVID-19.
What to Include In Your Financial Disclosures
There are three key items to include any financial disclosure that’s impacted by COVID-19:
- Where your company stands today, both operationally and financially.
- How your COVID-19 response and strategy – including your efforts to protect the health and wellbeing of your employees and customers – is progressing.
- How your operations and financial condition may change as efforts related to COVID-19 continue to progress.
Financial Disclosure Areas That May Require Estimation
Understandably, the SEC has not second-guessed ongoing good faith attempts to provide the public with appropriately-framed, forward-looking information. The SEC’s Office of the Chief Accountant (OCA) recognizes that your actual financial and operations results may be substantially different from what would typically be considered reasonable estimates.
For context, the Office of the Chief Accountant is “responsible for accounting and auditing matters arising in the Commission’s administration of the federal securities laws” regarding:
- Accounting policy determinations
- The form and content of financial statements to be filed with the Commission
- Internal control over financial reporting (ICFR) matters
There are several accounting areas that may involve significant estimates and judgments due to the impacts of COVID-19. These include:
- Adoption of new accounting standards
- Debt modifications or restructurings
- Fair value and impairment considerations
- Going concern
- Income taxes
- Revenue recognition
- Subsequent events
Tips for Preparing Your Financial Disclosures
There are several important factors to keep in mind as you prepare your disclosures in the age of COVID-19. We’ll provide tips for handling each of these financial reporting requirements in the following sections.
Provide Information That Benefits Investors
Always provide relevant information that allows investors to make informed decisions when it comes to your company. This protects them from being taken advantage of by company insiders who may pursue criminal investment strategies.
Provide Information That Benefits Your Company
Present detailed information that demonstrates you have a well-thought-out and executable strategy for addressing the effects of COVID-19. This not only boosts your public reputation, but it can also draw more investors to your company.
Provide Company-Specific Plans for Addressing the Impact of COVID-19
Have a comprehensive understanding of the need for broad coordination across employees, firms, investors, and governmental officials. A clearly-articulated strategy promotes higher levels of public confidence and understanding, which can facilitate action and reduce risk aversion.
Provide As Much Information As Is Practicable
Provide as much data as possible regarding your current operating and financial status, including information about your future operational and financial planning. It may be tempting to resort to generic disclosures, but these don’t inform investors of your status, operational strategies, and risks.
Disclose Information Regarding the CARES Act
According to the U.S. Department of the Treasury, the Coronavirus Aid, Relief, & Economic Security (CARES) Act is dedicated to “providing critical assistance to small businesses across the country [by] facilitating the urgent deployment of capital and support to help these organizations not just persevere, but recover on solid footing.”
If you’ve received financial assistance under the CARES Act, you must disclose the following relevant information:
- The short- and long-term impact of that assistance on your financial condition
- Results of operations, liquidity, and capital resources
- Related disclosures and critical accounting estimates/assumptions within MD&A
There are three distinct aspects of the CARES Act to consider as you prepare your financial disclosures. We’ll provide a few details on each of these below:
- Small Business Tax Credit Programs
- “The American Rescue Plan extends the availability of the Employee Retention Credit for small businesses through December 2021 and allows businesses to offset their current payroll tax liabilities by up to $7,000 per employee per quarter.”
- “The American Rescue Plan extends through September 2021 the availability of Paid Leave Credits for small and midsize businesses that offer paid leave to employees who may take leave due to illness, quarantine, or caregiving. Businesses can take dollar-for-dollar tax credits equal to wages of up to $5,000.”
- Emergency Capital Investment Program (ECIP)
- “Created to encourage low- and moderate-income community financial institutions to augment their efforts to support small businesses and consumers in their communities.”
- Paycheck Protection Program (PPP)
- “Provides small businesses with funds to pay up to eight weeks of payroll costs, including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities.”