On June 23, 2020, the employees of the Division of Company Finance of the Securities and Alternate Fee (the “SEC”) issued extra disclosure steerage (“Subject No. 9A”) offering the employees’s most up-to-date views concerning operations, liquidity, and capital sources disclosures and different compliance obligations associated to COVID-19 and its impacts on companies and markets. Subject No. 9A dietary supplements the Division’s Disclosure Steering Subject No. 9 issued on March 25, 2020. A hyperlink to new Subject No. 9A will be discovered right here and a hyperlink to the sooner Subject No. 9 will be discovered right here.
Disclosure Issues Concerning Operations, Liquidity and Capital Assets
In issuing Subject No. 9A, the employees continues to encourage reporting corporations to offer disclosures that enable buyers to guage, by the eyes of administration and the Board of Administrators, the present and anticipated influence of COVID-19 on the corporate’s operations and monetary situation, together with liquidity and capital sources, and to replace disclosures as details and circumstances change.
The employees additional noticed that reporting corporations have usually made a variety of operational changes in response to the consequences of COVID-19 (resembling transitioning to telework or implementing provide chain and distribution changes), the disclosure of which can be materials to an funding or voting choice. Reporting corporations have additionally undertaken all kinds of more and more refined financing actions to handle liquidity considerations arising from the consequences of COVID-19, a lot of which have progressive phrases and constructions. The employees emphasised the significance of offering sturdy and clear disclosures round these efforts to handle short-term and long-term liquidity and funding dangers within the present financial surroundings. Noting some corporations have included these disclosures in earnings releases, the employees additional inspired corporations to think about whether or not such disclosures, in gentle of their materiality, must be included in administration’s dialogue and evaluation (“MD&A”) sections of periodic stories.
Below the employees’s steerage articulated in Subject No. 9A, every reporting firm ought to analyze the influence of COVID-19 on its monetary situation, outcomes of operations, liquidity and capital sources with a view to potential disclosures concerning a number of matters, together with:
Responses to operational challenges noticed by administration and the Board of Administrators, such because the implementation of recent well being and security insurance policies within the office, and their influence on monetary situation;
Total liquidity place and the influence of any decreases in money move, together with examination of the corporate’s sources and makes use of of funds and the materiality of assumptions concerning the impacts of COVID-19 on revenues;
Use of revolving traces of credit score or capital raised in public or personal markets to handle liquidity wants, in addition to any unused sources of liquidity;
Entry to conventional funding sources, together with any modifications in customary phrases, collateral or assure necessities, and any influence on the corporate’s potential to keep up its present operations;
Dangers of fabric non-compliance with covenants in credit score and different agreements;
Use of money burn price, day by day money use or comparable metrics, and the definitions, estimates and assumptions underlying these metrics;
Reductions in or suspensions of capital expenditures, share repurchase applications and dividend funds; cessations of enterprise operations or inclinations of fabric property or enterprise traces; and modifications in human capital expenditures; and the influence of such changes on the corporate’s potential to satisfy its monetary obligations;
Potential to well timed service monetary obligations, and any use of deferral durations, forbearance durations or different concessions;
Alterations to buyer agreements (together with prolonged fee phrases) which will influence the corporate’s monetary situation, liquidity or capital sources; and
Affect of occasions occurring after the top of the reporting interval however earlier than monetary statements are issued, and whether or not such occasions represent identified traits or uncertainties that must be mentioned in MD&A.
Disclosing Authorities Help below the CARES Act
The employees famous its view that reporting corporations receiving federal monetary help below the CARES Act within the type of loans and tax reduction within the type of deferred or decreased funds ought to take into account the short-term and long-term influence of that help on their monetary situation, outcomes of operations, liquidity and capital sources, in addition to the associated disclosures and demanding accounting estimates and assumptions.
Firms ought to take into account disclosing:
Impacts of such loans on monetary situation, liquidity and capital sources;
Anticipated potential to adjust to the fabric phrases and circumstances of any such help;
Limitations on potential to hunt different financing sources;
Whether or not necessities to keep up employment ranges are moderately anticipated to have a cloth influence on revenues or earnings;
Affect of current tax reduction on short-term and long-term liquidity; and
Whether or not monetary help entails new or modified materials accounting estimates or judgments that must be disclosed.
Persevering with as a Going Concern
The employees inspired reporting corporations to think about whether or not circumstances and occasions elevate substantial doubt concerning the firm’s potential to satisfy its obligations as they turn into due inside one yr after the issuance of the monetary statements. The place substantial doubt arises about an organization’s potential to proceed as a going concern or administration has addressed such substantial doubt, administration ought to present acceptable disclosures within the monetary statements and MD&A.
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