Coronavirus (COVID-19) – Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources

On June 23, 2020, the Securities and Exchange Commission (“SEC” or “Commission”) Division of Corporation Finance released guidance regarding operations, liquidity, and capital resources disclosures companies should consider with respect to business and market disruptions related to COVID-19. These disclosures should enable an investor to understand how management and boards of directors are analyzing the current and expected impact of COVID-19 on companies’ operations and financial condition, including liquidity and capital resources. The topics and considerations discussed later on are meant to supplement CF Disclosure Guidance Topic No. 9. It is important to note that this guidance is not a rule, regulation or statement of the SEC.

Operations, Liquidity, and Capital Resources

Companies have undertaken and are generally in the process of making a diverse range of operational adjustments in response to the effects of COVID-19. These adjustments may have an effect on a company that would be material to an investment or voting decision. Affected companies should carefully consider their obligations to disclose this information to investors.

Companies also are undertaking a diverse and sometimes complex range of financing activities in response to the effects of COVID-19 on their businesses and markets. It is important that companies provide robust and transparent disclosures about how they are dealing with short- and long-term liquidity and funding risks in the current economic environment, particularly to the extent efforts present new risks or uncertainties to their businesses.

The following considerations should be made when determining the appropriate disclosures:

• What are the material operational challenges that management and the board of directors are monitoring and evaluating? How are the changes impacting or reasonably likely to impact your financial condition and short- and long-term liquidity?
• How is the overall liquidity position and outlook evolving? Have revolving lines of credit been utilized or has there been capital raises to address liquidity needs?
• Have COVID-19 related impacts affected the ability to access traditional funding sources on the same or reasonably similar terms as were available to you in recent periods?
• Is there a material risk of not meeting covenants in credit and other agreements?
• If metrics, such as cash burn rate or daily cash use, are already disclosed, is there a clear definition of the metric and explaining how management uses the metric in managing or monitoring liquidity?
• Have capital expenditures been reduced and, if so, how?
• Is the company able to timely service debt and other obligations? Has the company entered into any agreements related to payment deferrals, forbearance periods, or other concessions?
• Has the company altered terms with their customers, such as extended payment terms or refund periods, and, if so, how have those actions materially affected its financial condition or liquidity?
• Does the company rely on supplier finance programs, otherwise referred to as supply chain financing, structured trade payables, reverse factoring, or vendor financing, to manage cash flow?
• Has an assessment been made for the impact of material events that occurred after the end of the reporting period, but before the financial statements were issued and considered whether disclosure of subsequent events in the financial statements and known trends or uncertainties in MD&A is required?

Government Assistance – The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

The CARES Act includes financial assistance for companies in the form of loans and tax relief in the form of deferred or reduced payments and potential refunds. For further reference, please see https://home.treasury.gov/policy-issues/cares. Companies receiving federal assistance should consider the short- and long-term 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. Questions to consider include:

• How does a loan impact the company’s financial condition, liquidity and capital resources? What are the material terms and conditions of any assistance received, and does the company anticipate being able to comply with them?
• Does the company reasonably expect restrictions, such as maintaining certain employment levels, to have a material impact on revenues or income from continuing operations or to cause a material change in the relationship between costs and revenues?
• Is the company taking advantage of any recent tax relief?
• Does the assistance involve new material accounting estimates or judgments that should be disclosed or materially change a prior critical accounting estimate?

Ability to Continue as a Going Concern

Management should consider whether conditions and events, taken as a whole, raise substantial doubt about the company’s ability to meet its obligations as they become due within one year after the issuance of the financial statements. Management should provide the appropriate respective disclosures in the financial statements and consider the following questions regarding the Management Discussion and Analysis (MD&A) disclosure:

• Are there conditions and events that give rise to the substantial doubt about the company’s ability to continue as a going concern?
• What are the plans to address these challenges and have they been implemented?