All posts by George Wilson

The SEC Professionals Group and Examples of COVID-19’s Disclosure Impact

COVID-19, Reporting

If you are not familiar with the SEC Professionals Group, you will find that this member-managed group is a great source of SEC reporting information, community and support.  One such example is its weekly “Corona Conversations,” which takes place each Friday at 1 p.m. EDT (30 to 60 minutes), where members connect and discuss new topics weekly.  In these virtual meetings, members can raise questions and share insights and knowledge to help support each other as we all deal with the impact of COVID-19.

In the April 17, 2020, “Corona Conversation,” Alyson Clabaugh of Intelligize and George Wilson of SEC Institute reviewed accounting and disclosure areas affected by COVID-19, focusing on questions from members and providing example disclosures from recent filings.  They will continue this review of examples in the April 24, 2020 meeting.

Here are some of the topics included in the April 17 discussions:

  • A disclosure in response to a question about CARES Act disclosures:

AEHR TEST SYSTEMS • 10-Q (Q3 2020) • 04/14/2020
On March 27, 2020, the “Coronavirus Aid, Relief and Economic Security (CARES) Act” was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company is currently analyzing the impact of these changes and therefore an estimate of the impact to income taxes is not yet available. https://apps.intelligize.com/SECFilings/View/Filings/18437872

  • Two examples in response to a question about the classification of lease termination costs:

FRANKLIN COVEY CO • 10-Q (Q2 2020) • 04/09/2020
SG&A Expense. Decreased Direct Office SG&A expense was primarily due to the office closure in China related to the COVID-19 outbreak, reduced travel and advertising costs, and savings in other areas of Direct Office operations. These reductions were partially offset by increased associate expenses resulting from increased commissions on higher sales and new sales and sales-related https://apps.intelligize.com/SECFilings/View/Filings/18431937

OFFICE DEPOT INC• 10-K (FY 2019) • 02/26/2020.
[Risk factor] As a consequence, trade restrictions, including new or increased tariffs, quotas, embargoes, sanctions, safeguards, customs restrictions, epidemics/pandemics, like coronavirus, and mandatory government closures could increase our cost of goods sold or reduce the supply of the products available to us. https://apps.intelligize.com/SECFilings/View/Filings/18325765

  • A reference to CorpFin Disclosure Guidance Topic 9 in response to a question about non-GAAP measures related to COVID-19:

See the non-GAAP guidance here: https://www.sec.gov/corpfin/coronavirus-covid-19

  • An example in response to a question about non-GAAP measure disclosures:

CITIZENS FINANCIAL GROUP INC/RI • 8-K (Items: 2.02, 7.01, 9.01) ● 04/17/2020 • EX-99.1.
Key performance metrics, non-GAAP financial measures and reconciliations – Underlying excluding the impact of COVID-19 on provision for credit losseshttps://apps.intelligize.com/SECFilings/View/Filings/18443473/Exhibits/12110912

  • An example about COVID-19 risks and uncertainties disclosures:

WOD RETAIL SOLUTIONS, INC. • 10-K (FY 2019) • 04/16/2020
Risks and Uncertainties. In December 2019, a novel strain of coronavirus surfaced in China, which has and is continuing to spread throughout the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (COVID-19) a “Public Health Emergency of International Concern,” and on March 11, 2020, the World Health Organization characterized the outbreak as a “pandemic”. The governors of New York, California and several other…https://apps.intelligize.com/SECFilings/View/Filings/18442914

  • Three examples in response to a question about the impact of COVID-19 on ICFR:

INTEGRITY APPLICATIONS, INC. • 10-K (FY 2019) • 04/14/2020
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As the Company has historically had personnel both in the U.S. and Israel, there has been no change in working status due to working remotely as a result of COVID-19.https://apps.intelligize.com/SECFilings/View/Filings/18438236

NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORP /DC/ • 10-Q (Q3 2020) • 04/10/2020
There were no changes in our internal control over financial reporting that occurred during the three months ended February 29, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Subsequent to February 29, 2020, we have not experienced any material impact to our internal controls over financial reporting given that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact to their design and operating effectiveness.https://apps.intelligize.com/SECFilings/View/Filings/18434581

INSPIRED ENTERTAINMENT, INC. • 10-K (FY 2019) • 03/30/2020
Our Board of Directors and management take internal control over financial reporting and the integrity of our financial statements seriously. Prospectively and in particular while the current remote working conditions associated with the COVID-19 outbreak remain in effect, Management intends to ensure that all reviews are fully completed prior to issuing the draft financial statements to our external auditors (or where possible make it clear this is the case) . Management will also add an additional third-party external review of the financial statements to the process prior to submission moving forward. At this time, we cannot provide assurance that these remediation efforts will be successful or that our internal control over financial reporting will be effective as a result of these efforts. In addition, we continue to evaluate and work to improve our internal control over financial reporting related to the identified deficiencies that led, in aggregate, to a material weakness, management may determine to take additional measures to address control deficiencies or determine to modify the remediation plan described above. assurance level as of December 31, 2019.https://apps.intelligize.com/SECFilings/View/Filings/18409342

  • Two examples in response to questions about the impact of COVID-19 on CECL:

PNC FINANCIAL SERVICES GROUP, INC. • 8-K (Items: 2.02, 9.01) • 04/15/2020.
Provision for credit losses of $914 million, which was calculated under the Current Expected Credit Loss (CECL) accounting standard effective January 1, 2020, increased $693 million primarily due to the significant economic impact of COVID-19 and loan growth…
https://apps.intelligize.com/SECFilings/View/Filings/18438858

HOME BANCSHARES INC • 8-K (Items: 2.02, 7.01, 9.01) ● 04/16/2020 • EX-99.1
The CECL double accounting for LH-Finance was $9.3 million. The normal CECL loan provision was approximately $5.0 million and the CECL COVID-19 loan provision was approximately $71.7 million. Our CECL provisioning model is significantly tied to projected unemployment rates. As a result of COVID-19, the unemployment rate projections significantly increased from January 1 to the end of March 2020.
https://apps.intelligize.com/SECFilings/View/Filings/18441297

  • A publication about accounting for government assistance in response to a participant question:

EY Guidance on government assistance: TTP08738-201US_CARESAct_04-03-2020.pdf

You can find other disclosure examples in the archived minutes from the April 17 Corona Conversation on the SEC Pro’s group webpage.

The SEC Pro Group also conducts quarterly meetings and other functions to provide support and knowledge for members.  You can learn more and apply for membership here.

You can also complete SEC Pro Group’s benchmarking survey and participate in setting the focus areas for the coming year.

As always, your thoughts and comments are welcome!

SECI’s 35th Midyear Forums to be Offered as Live Webcasts

About SECI

This June, SEC Institute’s 35th Midyear SEC Reporting and FASB Forums will be offered as live webcasts only rather than being held in person in New York and San Francisco.  This will enable us to provide a safe learning environment for participants and faculty.

The live webcast of the New York program will be on June 11-12, 2020 and will begin at 8:00 a.m. EDT.  The live webcast of the San Francisco program will be on June 15-16, 2020 and will begin at 8:00 a.m. PDT.

Participants will  have access to all program materials, will be able to view the program slides and submit questions to the speakers during the presentation.

As always, the programs will be focused on the key issues facing us in the SEC reporting realm and will include:

  • A review of accounting, disclosure and reporting relief related to COVID-19
  • Focus on accounting and reporting on impairment issues
  • SEC staff focus areas, including, revenue recognition, fair value measurements, segment reporting and non-GAAP measures and metrics
  • Modernization of Regulation S-K and proposed changes to Regulation S-X
  • Business combinations accounting issues, including business combination versus asset acquisition, assigning amounts to assets and liabilities, and contingent consideration
  • Update on MD&A, including disclosures related to the impact of COVID-19, changes from the SEC’s Disclosure Effectiveness project and disclosures concerning reference rate reform and Brexit
  • Status of the credit losses standard implementation and other financial instruments hot topics

You can learn more and register for the webcasts here.

As always, your thoughts and comments are welcome.

FASB Addresses Impact of COVID-19 and Publishes Lease Accounting Q&A

COVID-19

As we mentioned in this post, the FASB met on April 8, 2020, to address “Accounting Relief During the COVID-19 Pandemic.”  You can read Chairman Russell G. Golden’s statement about the meeting here.

Topics addressed were primarily for private companies and not-for-profits.  Steps included decisions to issues proposals for an optional one-year delay for the new leasing standard for private companies and not-for-profits and a one-year delay for the revenue recognition for private company franchisors.

The FASB is also working on a number of question and answer documents related to the disruption created by COVID-19.  On April 10, 2020, the FASB published a Q&A document addressing questions dealing with lease concessions due to COVID-19.  Essentially the Q&A document provides that for such concessions companies will not have to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the contract and “can elect to apply or not apply the lease modification guidance in Topic 842 Leases or Topic 840 Leases to those contracts.”

While the meeting minutes are not yet posted, they will be available here when they are completed.  You can read a summary of the tentative decisions reached at the meeting here.

As always, your thoughts and comments are welcome!

A Few Example Proxies for Virtual Annual Meetings

COVID-19

As we discussed in our One-Hour Briefing “COVID-19 Challenges for First Quarter 2020 Form 10-Q and Annual Meetings,” holding a virtual annual meeting involves both state and securities law considerations.  If you are looking for example proxy statements for virtual annual meetings these two from Baxter International and Hub Group may be helpful.

Also, as an FYI, we are hearing about scheduling challenges as companies such as Computershare and Broadridge run out of capacity to accommodate the number of companies moving to virtual formats for their annual meetings.

As always, your thoughts and comments are welcome.

 

An Example of COVID-19 Forewarning Disclosures

COVID-19

In our recent One-Hour Briefing “COVID-19 Challenges for First Quarter 2020 Form 10-Q and Annual Meetings” we reviewed the SEC’s forewarning disclosure requirements.  Thanks to one of the folks listening to the briefing here is an example from BP.  While this is in a press release, it is an early warning and is a reasonable example of the language that would be appropriate in MD&A.  Towards the bottom of the press release in a section titled “First quarter update,” BP makes this statement:

“BP continues to review potential first quarter impairment charges and currently expects to take a non-cash, non-operating charge of around $1 billion in the quarter”

Thanks to all of you who have listened to our COVID-19 related programs, all of which are available without charge, and as always, your thoughts and comments are welcome.

SEC Chair and Corp Fin Director Issue Statement About COVID-19 Disclosure

COVID-19

On April 8, 2020, SEC Chairman Jay Clayton and CorpFin Director William Hinman issued a Public Statement titled “The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19.”

The Statement provides valuable thoughts, advice and guidance as we approach quarter-end earnings releases and reporting.  In previous statements and guidance about the impact of COVID-19 the SEC has consistently made the point that in a period of such dramatic disruption and uncertainty, providing investors information about management’s actions and plans to address this disruption is important, despite the uncertainty involved.

This Statement builds on this theme.  Chairman Clayton and Director Hinman say:

“We urge companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning.”

The Statement includes an extensive series of observations about the current environment and its uncertainties.  It then makes a number of disclosure related requests, including:

“Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in:

(1) where the company stands today, operationally and financially,

(2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and

(3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress.  Historical information may be relatively less significant.”

The Statement also enumerates important disclosure considerations in the current environment, including forward looking information issues.  The topics addressed are:

  • Our Collective, Full Mitigation Response to COVID-19 Has Substantially Affected our Economy and Our Markets.
  • SEC Actions Have Focused on Market Integrity and Function
  • There is Broad Support Among Market Participants for COVID-19 Mitigation Efforts
  • There is Broad Recognition of the Need for a Transition to Forward-Looking, Health and Welfare Strategies
  • Frameworks for Forward-Looking Health and Welfare Strategies are Coming Into Focus
  • Extensive Coordination Across the Public and Private Sectors Will Be Essential to Our Success in Fighting COVID-19
  • Q1 Earnings Reports and Related Investor and Analyst Calls Will Not be Routine
  • There is Intense Investor Interest in Company-Specific Operational and Financial Status and Plans for Addressing the Effects of COVID-19
  • We Request that Companies Provide as Much Information as is Practicable Regarding Their Current Status and Plans for Addressing the Effects of COVID-19
  • We Recognize that Producing Forward-Looking Disclosure Can be Challenging and Believe that Taking On that Challenge is Appropriate
  • Robust, Forward-Looking Disclosures Will Benefit Investors, Companies and, More Generally, Our Fight against COVID-19.  Such Disclosures Will Facilitate Communication and Coordination Among the Public and Private Sectors

As we approach quarter-end, this Statement is important reading.

As always, your thoughts and comments are welcome!

SEC Updates Staff Guidance for Conducting Shareholder Meetings in Light of COVID-19 Concerns

COVID-19, Reporting

On April 7, 2020 the SEC staff updated their guidance about annual meeting processes during the period of disruption cause by COVID-19.  The principle changes are:

The addition of a new section about delays in printing and mailing of full set of proxy materials

An update to clarify that the section on changes in date, time, and location applies to special meetings

An update by the Division of Investment Management to the section on changes in date, time, and location of a shareholder meeting addressing meetings held by investment companies in connection with business combinations or certain other transactions

If you would like more background about this guidance you can listen to the archived version of this complimentary One-Hour Briefing “COVID-19 Challenges for First Quarter 2020 Form 10-Q and Annual Meetings” and this blog post from March 13, 2020 about the original staff guidance.

As always, your thoughts and comments are welcome!

SEC Issues Two C&DI’s Dealing with COVID-19 Deadline Relief

Reporting

On April 6, 2020, CorpFin issued two Compliance and Disclosure Interpretations related to its Order providing COVID-19 reporting relief.  The first deals with the interaction of Form 10-K General Instruction G’s provision allowing incorporation by reference of information required in Part III of Form 10-K if a company expects to furnish its proxy within 120 days of year-end.  The second deals with the interaction of U.S. and Canadian COVID-19 related relief for filers that use Form 40-F, which is part of the SEC’s MJDS.

You can also find the SEC’s earlier C&DI’s dealing with the interaction of Form 12b-25 and the provisions in the Order in this post.

Question 104.18

Question: Form 10-K allows Part III information to be incorporated by reference from a registrant’s definitive proxy or information statement, or, under certain circumstances, filed as an amendment to the Form 10-K, not later than 120 days after the end of the related fiscal year. May a registrant that is unable to file the Part III information by the 120-day deadline avail itself of the relief provided by the COVID-19 Order (Release No. 34-88465(March 25, 2020)) for the filing of the Part III information?

Answer: Yes, as long as the 120-day deadline falls within the relief period specified in the Order and the registrant meets the conditions of the Order.

  • A registrant that timely filed its annual report on Form 10-K without relying on the COVID-19 Order should furnish a Form 8-K with the disclosures required in the Order by the 120-day deadline. The registrant would then need to provide the Part III information within 45 days of the 120-day deadline by including it in a Form 10-K/A or definitive proxy or information statement.
  • A registrant may invoke the COVID-19 Order with respect to both the Form 10-K and the Part III information by furnishing a single Form 8-K by the original deadline for the Form 10-K that provides the disclosures required by the Order, indicates that the registrant will incorporate the Part III information by reference and provides the estimated date by which the Part III information will be filed. The Part III information must then be filed no later than 45 days following the 120-day deadline.
  • A registrant that properly invoked the COVID-19 Order with respect to its Form 10-K by furnishing a Form 8-K but was silent on its ability to timely file Part III information may (1) include the Part III information in its Form 10-K filed within 45 days of the original Form 10-K deadline, or (2) furnish a second Form 8-K with the disclosures required in the Order by the original 120-day deadline and then file the Part III information no later than 45 days following the 120-day deadline by including it in a Form 10-K/A or definitive proxy or information statement. [April 6, 2020]

Question 112.02 

Question: An MJDS filer is required to file its Form 40-F on the same day the information included therein is due to be filed with any securities commission or equivalent regulatory authority in Canada. If an MJDS filer properly relies on any applicable Canadian COVID-19-related relief for extension of its filing deadline with the securities commission or equivalent regulatory authority, does the MJDS filer need to comply with the conditions for exemptive relief in the SEC’s COVID-19 Order (Release No. 34-88465 (March 25, 2020)) on the date the Form 40-F would have been due in the United States?

Answer: No. Under these facts, compliance with the conditions of the SEC’s COVID-19 Order on the original due date of the Form 40-F is not required. MJDS filers should also consider promptly disclosing their reliance on the Canadian COVID-19-related relief. [Apr. 6, 2020]

As always, your thoughts and comments are welcome!

SEC Chief Accountant Issues COVID-19 Statement Including CECL Considerations

Reporting

On April 3, 2020, SEC Chief Accountant Sagar Teotia issued a Public Statement titled “Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19.”  In the Public Statement he addresses the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

The Cares Act, in Section 4014, provides a deferral for the Current Expected Credit Loss accounting standard (ASC 326) for insured depository institutions and credit unions insured by the National Credit Union Administration.  This deferral will end when the national emergency related to the outbreak of COVID-19 ends.  The uncertainty as to when the deferral will end presents significant tactical challenges. This deferral has also raised hopes that the FASB might extend the deferral to other entities.

The CARES Act, in Section 4013, also provides relief from troubled debt restructuring accounting for “financial institutions,” a term which is undefined in the Act.

In his Public Statement, Chief Accountant Teotia states:

The CARES Act, which was signed into law by the President on March 27, 2020, allows a limited number of entities the option to temporarily defer or suspend the application of two provisions of U.S. Generally Accepted Accounting Principles (GAAP).   OCA has received inquiries from preparers and auditors where the preparer has concluded that election of these narrow and limited options in Sections 4013 and 4014 of the CARES Act would be deemed to be in accordance with GAAP.  For those entities that are eligible for, and elect to apply, either of Sections 4013 or 4014 of the CARES Act, the staff would not object to the conclusion that this is in accordance with GAAP for the periods for which such elections are available.

 In this environment of uncertainty and hope, the FASB has scheduled a meeting for April 8, 2020 to “Address Standard-Setting Issues During the Coronavirus (COVID-19) Pandemic.”  You can read about the issues to be addressed, including “Agenda requests for deferral of standards” in this media advisory.

So, stay tuned!

In addition to the CECL deferral, the Public Statement also addresses:

  • the many judgments that may be required due to the disruption and uncertainty created by COVID-19, with a reminder that OCA has “consistently not objected to well-reasoned judgments that entities have made” and that they will “continue to apply this perspective”
  • auditing challenges and working with the PCAOB
  • coordination with international organizations
  • engagement with stakeholders

As always, your thoughts and comments are welcome!

In Case You Missed Our inSecurities Podcast

Reporting

Last week we posted about PLI’s inSecurities Podcast, an enjoyable and positive way to spend time during this period of disruption and uncertainty.  Episode 6 of the Podcast delves into whistleblower issues, which ties in nicely to two recent SEC announcements.  First, on March 30, 2020, the SEC reinforced the importance of its whistleblower program in this press release announcing another major cash award to a whistleblower.  This is the SEC’s third case where a whistleblower worked in a “compliance or internal audit” role.  Second, on April 3, 2020, the SEC announced this $2 million award to another whistleblower

Episode 6 of inSecurities can help you understand the fascinating and complex issues in this type of case.

We hope this helps you use your time in a valuable way during this period, and as always, your thoughts and comments are welcome!