Some impacts of the COVID-19 pandemic on daily life are logical – people working from home and extra precautions regarding cleanliness – but things like toilet paper shortages, schools converted to online learning, and a noticeable lack of haircuts, have caught people by surprise. Impacts of the pandemic on SEC reporting have been similar, with some of the impacts expected, and other impacts surprising.
The SEC has been quick to address issues and questions created by the pandemic to ensure investors continue to have access to full-disclosure, thorough, and easily comparable financial information. This post will summarize recent SEC guidance and fill you in on other aspects of SEC filings most likely to be impacted under existing rules.
The toilet paper crisis of 2020 came as a big shock. But now that shelves are mostly restocked, it almost seems like we should have foreseen it. After all, people want to be comfortable while they’re staying at home, and what says comfort more than a plush roll of TP?
Similarly, the changes and accommodations granted by the SEC would have seemed crazy a few months ago, but they make complete sense in our current reality.
Filing Deadline Extension for Impacted Companies
The SEC announced a 45-day extension to filing deadlines for companies impacted by the COVID-19 pandemic. This extension applies to almost all filings under the Exchange Act with original due dates prior to July 1, 2020. While it isn’t new for the SEC to provide appropriate relief when companies are impacted by conditions outside of their control that prevent timely filing, this ruling will likely impact more companies than relief orders in the past. To take advantage of the extension, companies must do the following:
- Furnish a Form 8-K (or Form 6-K for foreign private issuers) by the original due date explaining why the company could not file on time and when it expects to file. The Form should include a company-specific risk factor detailing COVID-19 impacts. If the reason for the delay relates to an opinion, report, or certification that the company cannot obtain on time from a third party, the Form must also include a signed statement from that third party stating the reasons.
- File the report in question within 45 days of the original deadline.
- Include disclosure in the filed report claiming reliance on the SEC’s order granting the extension and why it was necessary.
See the full SEC order here.
Deferral of Two Accounting Standards
The effective dates of new accounting standards get moved all the time. However, it’s usually the FASB or the IASB making the call on that, not the U.S. government. Here’s a unique exception: the CARES Act, signed on March 27, 2020, includes provisions that delay the effective date of the new credit loss guidance in ASU 2016-13 for financial institutions, and allow those same entities to elect not to apply the troubled debt restructuring guidance in ASC 310-40. Both exceptions currently only extend through the end of 2020 at the latest.
Signatures in SEC filings
SEC rules require filers to obtain a manual signature from required signers prior to including their typed signature within electronic filings. Due to “health, transportation, and other logistical concerns” caused by COVID-19, the SEC is allowing individuals to maintain the signed pages themselves, as long as they include the date and time on the document and the filer establishes a procedure to cover the process. Click here for the full announcement.
Along similar lines, the SEC is temporarily allowing new filers who need to gain access to the EDGAR filing system to bypass the notary signature on the required form if COVID-19 is making it difficult to access a notary.
Every quarter, companies assess how changes in their business, the economy, and accounting and reporting rules affect their financials and disclosures. So, it comes as no surprise that SEC filers will need to consider how the pandemic may influence what they report under existing guidance. Remember, safe harbor rules regarding forward-looking statements apply. Here are some of the more significant areas to look at:
Chances are, you already have a generic risk factor that addresses the possibility of a natural disaster or even a pandemic. But now is the time to get more specific. How could the pandemic impact your business plans, access to capital, liquidity, financial condition, and results of operations?
Has the pandemic impacted demand for your products or services? (Hint: If your company makes toilet paper or hand sanitizer, the answer is YES! But don’t underestimate the impacts on ALL industries.) Have processes been disrupted – due to supply chain interruptions, difficulty providing remote access to employees, or a reduction in the workforce, whether caused by illness, site closures, or layoffs? What other changes have impacted the business?
In order to provide investors with a clear understanding of a company’s financials, the SEC wants to see discussion in filings of known trends and uncertainties. The often-static statements in MD&A need to be looked at closely and updated as necessary to provide information specific to the current crisis.
Financial Statements and Footnotes
Companies should consider how financials could be impacted under existing guidance related to fair value calculations, asset impairment, lease accounting, restructuring provisions, hedging, customer credit risk, subsequent events, and more. Our recent vlog post highlighted the top five accounting issues to be considered, and this blog post covered the issue of non-financial asset impairment.
Disclosure Controls & Procedures / ICFR
Processes used to put together a company’s annual and quarterly filings, and internal controls over those processes, could be significantly impacted by the pandemic. For example, companies may have changed IT access to allow for remote work, personnel performing key internal controls may be different, or restrictions on travel plans could impact key processes. These changes should be disclosed.
In some instances, if a GAAP financial measure is not available in time for the earnings release due to COVID-19 impacts, the SEC would allow a reconciliation to a provisional GAAP measure. Don’t forget that the standard non-GAAP rules still apply, and the GAAP measure must be presented with more prominence. Additionally, it would not be appropriate to present a non-GAAP measure that adds an estimate of lost earnings to the GAAP measure.
Earnings Guidance and Other Considerations
If a company becomes aware of a significant impact outside of the normal reporting cycle (for example, prior earnings guidance is no longer relevant, or a major impairment has occurred) immediate disclosure on a Form 8-K should be considered. The company should consult with SEC counsel as needed in these cases.
It would be nearly impossible for this post to cover all financial reporting impacts, as guidance continues to evolve with the ever-changing environment. However, the AICPA’s reports on financial reporting impacts and auditing impacts of COVID-19 are helpful resources. You can always go directly to the SEC’s COVID-19 response website, or contact us with any questions. Our courses on asset impairment, revenue recognition, and leases can also provide a refresher on the accounting rules as you navigate through necessary accounting changes during this unprecedented time.
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This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.
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