COVID-19 has been one of the most disruptive and potentially transformative events in a generation. Though market volatility has settled somewhat since March, the pandemic’s recent surge has once again generated economic concern and uncertainty globally. For companies, it is imperative that they handle related disclosures professionally and accurately while being adept and clever enough to continually shape the narrative, navigating widespread speculation amidst the potential advent of a bear market and global recession.
In this paper we will give you a brief synopsis on SEC suggested guidelines on assessing and disclosing the impact of COVID-19 and then give you some practical suggestions on how to think about your investor communication and response.
The Coronavirus pandemic has put the business of risk communication front and center
Recent Regulatory Guidance
In immediate response to the crisis, regulators have permitted issuers to delay publication of annual and quarterly financial reports. In the US, the Securities and Exchange Commission (SEC)’s Division of Corporation Finance released disclosure guidance earlier this year in the wake of the COVID-19 crisis. It encouraged registrants to assess the continued effects of COVID-19 on their operations when considering appropriate public disclosures regarding related risks, including how the company and management are responding to them. The SEC suggested this should be done in a way that is specific to a company’s situation, to allow investors to evaluate the current and expected impact of COVID-19 on the company’s operations.
Assessing & Disclosing the Evolving Impact of COVID-19
As companies assess COVID-19-related effects and consider their disclosure obligations, questions management needs to consider with respect to their present and future operations may include:
- How has COVID-19 impacted your financial condition and results of operations? In light of changing trends and the overall economic outlook, how do you expect COVID-19 to impact your future operating results and near-and-long-term financial condition?
- How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? – (Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your debt or other financial obligations.)
- How do you expect COVID-19 to affect assets on your balance sheet and your ability to timely account for those assets? For example, will there be significant changes in judgments in determining the fair-value of assets measured in accordance with U.S GAAP or International Financial Reporting Standards (IFRS)?
- Do you anticipate any material impairments? (e.g., with respect to goodwill, intangible assets, long-lived assets, right of use assets, investment securities), increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on your financial statements?
- Have COVID-19-related circumstances such as remote work arrangements adversely affected your ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures?
- Do you anticipate a material adverse impact of COVID-19 on your supply chain or the methods used to distribute your products or services?
The above list is illustrative but not exhaustive (and obviously could be situation-specific). Every company should be continually assessing the pandemic’s impact and how it might affect your disclosure strategy and obligations.
Withdraw, Revise, or Reaffirm?
In this rapidly evolving environment, quantitative information—the preference of most investors—may not be available. In those cases, affected companies may need to consider how material the disruption is to their business—an increasingly difficult task as uncertainty related to the impact and duration of the pandemic persists—and respond accordingly.
In the near term, this lack of information may be affecting guidance. Typically, when talking to investors, companies have three choices: withdraw, revise, or reaffirm their guidance.
Painting the Big Picture
Some investors might also appreciate learning how a company is monitoring and managing COVID-19 impacts. Management can discuss, for example, its expectations for situations that might be improving, worsening, or stabilizing. Such big picture responses can be particularly effective in a communications void. Without them, the market often comes to its own conclusions on performance—a circumstance that usually fails to deliver the organization’s intended message.
Assessing the Next Normal
While the timing is uncertain, the pandemic will subside at some point. Nevertheless, tectonic plates have shifted and business as usual has likely changed. This shift offers an opportunity for executives to consider the impact of their COVID-19 responses on their companies’ risk profile and competitive standing.
The last point is especially true for small and microcap issuers. The shifts we mentioned may work in your favor and present unique opportunities that may not have existed previous to the pandemic. It also presents the opportunity for small and microcap issuers to demonstrate “supreme professionalism” in their ability to communicate clearly and concisely with stakeholders and investors.
The advent of COVID-19 is a novel risk, which has resulted in logistical, health and financial issues many companies have never seen before. The challenge is to provide investors with accurate information about the future while information about the virus is changing on a daily basis. Companies are scrambling to cope with its effects on their business and attempting to institute new policies and processes to comply with changing regulatory standards. The bottom line is that amid the chaos, companies need to pay sufficient attention to ensuring their disclosures are as defensibly precise and transparent as possible. This is a unique challenge but also presents an opportunity for issuers to rise above and set a new standard of professionalism in fair disclosure that should increase investor confidence and may have a positive effect on company valuation.