SEC’s Division of Corporation Finance Supplemental Disclosure Guidance: Topic No. 9A

On June 23, the Division of Corporation Finance (Division) of the Securities and Exchange Commission (SEC) issued CF Disclosure Guidance: Topic No. 9A (Guidance) supplementing CF Disclosure Guidance Topic No. 9 issued in March 2020 (Previous Guidance) and providing additional views of the Division regarding disclosures on operations, liquidity and capital resources that companies should consider in light of the business and market disruptions resulting from COVID-19. The Division encouraged companies to provide, revise and update disclosures that enable investors “to understand how management and the Board of Directors are analyzing the current and expected impact of COVID-19 on the company’s operations and financial condition, including liquidity and capital resources.”

The Division acknowledged that companies have made or are in the process of making operational adjustments to respond to the COVID-19 effects, including transition to telework and supply chain and distribution adjustments as well as suspension or modification of certain operations to comply with health and safety guidelines to protect employees, contractors and customers. Such adjustments may have a material effect, and companies should consider their obligation to provide disclosures to investors. The Division noted that companies which engage in diverse and complex financing activities in response to COVID-19 effects, including utilizing credit facilities, accessing public and private markets, implementing supplier finance programs, and negotiating new or modified customer payment terms, should provide “robust and transparent disclosure regarding short- and long-term liquidity and funding risks, especially new risks or uncertainties.” The Division recommended that companies should consider whether any information that is potentially material should also be included in management’s discussion and analysis (MD&A).

The Guidance lists a broad range of questions that a company should consider in evaluating its disclosures obligations, including, among others, the following:

• Operations. What are the material operational challenges that management and the Board of Directors are monitoring and evaluating, and how and to what extent have operations been altered? Considerations include health and safety policies for employees, contractors, and customers, to deal with these challenges and the impact of such changes on company’s financial condition and short- and long-term liquidity.
  
  
• Liquidity. How is company’s overall liquidity position and outlook evolving and to what extent COVID-19 is adversely impacting company’s revenues? Considerations include whether such impacts are material to company’s sources and uses of funds, as well as the materiality of any assumptions it makes about the magnitude and duration of COVID-19’s impact on its revenues and any decreases in cash flow from operations having a material impact on its liquidity position and outlook.
  
  
• Credit. To what extent has the company accessed revolving lines of credit or raised capital in the public or private markets to address its liquidity needs? Are its disclosures regarding these actions and any unused liquidity sources providing investors with a complete discussion of its financial condition and liquidity? Other considerations may be if COVID-19 related impacts affected company’s ability to access traditional funding sources on the same or reasonably similar terms as were available in recent periods, if the company has provided additional collateral, guarantees, or equity to obtain funding, if there have been material changes in company’s cost of capital, if a change, or a potential change, to company’s credit rating impacted its ability to access funding, if company’s financing arrangements contain terms that limit its ability to obtain additional funding and if the uncertainty of additional funding is reasonably likely to result in company’s liquidity decreasing in a way that would result in it being unable to maintain current operations.
  
  
• Capital Expenditures. To what extent has the company reduced its capital expenditures, reduced or suspended share repurchase programs or dividend payments, ceased any material business operations or disposed of a material asset or line of business? Considerations include material reduction or increase in human capital resource expenditures, whether these measures are temporary in nature, and, if so, how long does the company expect to maintain them, what factors will the company consider in deciding to extend or curtail these measures, what is the short- and long-term impact of these reductions on company’s ability to generate revenues and meet existing and future financial obligations?
  
  
• Payments. To what extent is the company able to timely service its debt and other obligations? Has the company taken advantage of available payment deferrals, forbearance periods, or other concessions? What are those concessions and how long will they last? Does the company foresee any liquidity challenges once those accommodations end?
  
  
• Customer payment terms. To what extent has the company altered terms with its customers, such as extended payment terms or refund periods, and, if so, how have those actions materially affected its financial condition or liquidity? Did the company provide concessions or modify terms of arrangements as a landlord or lender that will have a material impact? Has the company modified other contractual arrangements in response to COVID-19 in such a way that the revised terms may materially impact its financial condition, liquidity, and capital resources?
  
  
• Supplier finance programs. To what extent is the company relying on supplier finance programs, otherwise referred to as supply chain financing, structured trade payables, reverse factoring, or vendor financing, to manage its cash flow? Have these arrangements had a material impact on its balance sheet, statement of cash flows, or short- and long-term liquidity, and, if so, how? What are the material terms of the arrangements? Did the Company or any of its subsidiaries provide guarantees related to these programs? Does it face a material risk if a party to the arrangement terminates it? What amounts payable at the end of the period relate to these arrangements, and what portion of these amounts has an intermediary already settled for it?
  
  
• Metrics. If the company includes metrics, such as cash burn rate or daily cash use, in its disclosures, is it providing a clear definition of the metric and explaining how management uses the metric in managing or monitoring liquidity? Are there estimates or assumptions underlying such metrics the disclosure of which is necessary for the metric not to be misleading?
  
  
• Subsequent events. Has the company 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 its 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 Guidance also addresses disclosures related to financial assistance under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Companies receiving federal assistance should consider the impact of that assistance on their financial condition, results of operations, liquidity and capital resources, as well as the related disclosures and critical accounting estimates and assumptions. The Guidance includes suggested questions for consideration with respect to CARES Act assistance:

• Loans. How does a loan impact company’s financial condition, liquidity and capital resources? What are the material terms and conditions of any assistance a company received, and to what extent the company anticipates to comply with them? Other considerations include whether such terms and conditions limit company’s ability to seek other sources of financing or affect its cost of capital. If restrictions, such as maintaining certain employment levels, might have a material impact on company’s revenues or income from continuing operations or to cause a material change in the relationship between costs and revenues. Once any such restrictions lapse, if the company expects to change its operations in a material way.
  
  
• Tax Relief. To the extent the company is taking advantage of any recent tax relief, how does that relief impact its short- and long-term liquidity? Does the company expect a material tax refund for prior periods?
  
  
• Accounting Estimates. Does the assistance involve new material accounting estimates or judgments that should be disclosed or materially change a prior critical accounting estimate? What accounting estimates were made, such as the probability a loan will be forgiven, and what uncertainties are involved in applying the related accounting guidance?

The Division notes that a company should consider whether conditions and events, taken as a whole, raise substantial doubt about its ability to meet its obligations as they become due within one year after the issuance of the financial statements. Companies should provide appropriate financial statement disclosures when there is substantial doubt about their ability to continue as a going concern or such substantial doubt is alleviated by management’s plans. The Guidance suggests some questions for consideration, including if there are conditions and events that give rise to substantial doubt about the company’s ability to continue as a going concern, what the company’s plans are to address these challenges, and if the company has implemented any portion of those plans.

The Division released the Guidance on the same day that SEC’s Office of the Chief Accountant issued a “Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19” with additional information on accounting and auditing matters related to COVID-19. The statement can be found here.

The Previous Guidance can be found here, and the Guidance can be found here.