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Thursday, March 19, 2020

Key Considerations for SEC Registrants


Public companies are facing an unprecedented operating environment as they navigate a path through the ongoing coronavirus pandemic (COVID-19). Armanino is working hard to anticipate key issues public companies are likely to face and to partner with you through these unique challenges.

Here are some key items for management teams and governing bodies of public companies to consider as they manage the impact of COVID-19 on their financial market guidance, lender relationships, Securities and Exchange Commission (SEC) filings, and financial statement reporting:


Managing Market Expectations

  • Consider your existing quarterly and annual earnings per share guidance and the need to revise those expectations based on the COVID-19 impact you have experienced to date or expect to experience through your remaining fiscal year reporting periods and update your analysts and investors of revised expectations.
  • Due to the current challenging operating environment, in order to protect your balance sheet, you may be revising your anticipated capital expenditures for the remainder of the year. If you have provided guidance in this area, and implement significant revisions to your capital spend budget, communicate these changes to your analysts and investors.
  • Similar revisions to anticipated dividend distributions should also be considered, and resulting changes communicated timely to analysts and investors.

Managing Lender Relationships

  • Update your cash flow projections and consider future debt service requirements and evaluate your ability to stay current on these obligations. Inform your bank timely if there are anticipated shortfalls and engage with them to find solutions through this period of what hopefully are temporary debt service challenges.
  • Recent interest rate cuts could provide an excellent opportunity to refinance existing debt structures and improve your cost of capital. If possible, work with your lender to take advantage of this opportunity.
  • Utilizing updated operating result projections, reforecast your restrictive financial covenant compliance reporting, and assess the probability of a covenant violation.Approach your bank with anticipated violations and discuss potential compliance waiver options in advance.
  • If the changes to your operating environment create concerns about the reasonableness of current restrictive financial covenant terms, bring those concerns to your lender and explore appropriate revisions to problematic terms.
  • Consider available borrowing capacity under your current debt facilities, and whether taking advances on these facilities now, in anticipation of decreases in operating cash flows, is an appropriate step.

SEC Reporting Considerations

  • In order to keep your investors informed and to manage their expectations, carefully consider the need to include COVID-19 related disclosures in your upcoming SEC filings.
  • Update your risk factor disclosures for changes to the economy that could negatively impact your operations, concentrations of key customers or suppliers in geographic areas heavily impacted by COVID-19, as well as risks associated with increased capital market volatility.
  • Include in your management discussion and analysis disclosures updates on knownCOVID-19 impacts to your business as well as reasonably anticipated impacts on your operating results. Additionally, include updates on your plans to mitigate potential negative impacts on your business, such as plans to revise your capital expenditures and discretionary spending.
  • Update your disclosures for known or anticipated negative impacts to your liquidity and available capital resources.
  • Include disclosures related to any planned changes in your dividend policies.
  • Update your qualitative and quantitative disclosures related to market risks and impacts to the value of your equity as well as your cost of capital.

Managing Financial Reporting

  • Evaluate your financial statement close process and the impact that social distancing measures, such as remote work arrangements, may have on established procedures.Revise your processes as needed to ensure the timely completion of your financial close.
  • Additionally, consider the impact on your existing internal control structure that remote work arrangements may have. Specifically, consider the impact such measures may have on your ability to maintain appropriate segregation of duties.
  • Consider challenges that subsidiary reporting locations may be encountering and implement appropriate changes to ensure these locations continue to provide timely parent-level financial reporting and support.
  • Changes may be needed to your existing account valuation reserve methodologies to incorporate the impact of changes to your current operating environment, such as the appropriateness of your allowance for doubtful accounts or inventory valuation reserves.
  • Carefully consider your liability and expense account accruals and whether additionalCOVID-19 related accruals or adjustments are needed.
  • Decreases in operating performance may increase the risk of asset impairment or compound going concern issues. Utilize your updated cash flow projections in these important valuation exercises to ensure they remain accurate. Additionally, keep your external auditors up to date on the analysis results and any potential impact to your periodic financial statements.
  • Audit firms are also implementing social distancing measures that may necessitate alternative methods of providing audit evidence to them and completing the fieldwork phase of the audit. Collaborate with your auditor to develop audit approach and communication plans that may be required due to these changes to your current year audit environment.
  • Changes or additions to your financial statement footnotes may be warranted, such as your business description disclosures, your dividend policy disclosure, your financial concentration disclosures, and your subsequent event disclosures. Potential subsequent event disclosures should be evaluated through your independent audit firm’s report date and include such events as cancellations of significant customer or vendor contracts,modifications to existing debt agreements, and business operation closures.

At Armanino, we stand ready to partner with public companies to assist them through these challenging times. We will be reaching out too many of you, but contact us if you have an issue that we can help you navigate. Together, we will solve these challenges.

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