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SEC tells firms what it expects them to report on COVID-19 impacts but acknowledges “judgment and estimates” will be needed for “foreseeable future”

Richard Satran  Financial Journalist, Thomson Reuters Regulatory Intelligence

Richard Satran  Financial Journalist, Thomson Reuters Regulatory Intelligence

The U.S. Securities and Exchange Commission’s head of accounting regulation told firms that reliable reporting on the impact of COVID-19 will be vital for investors. But SEC Chief Accountant Sagar Teotia said that the financial reports will need to rely on estimates and judgment calls.

Teotia said that the SEC was willing to work with firms “to further high-quality financial information.” The agency has told firms that they might need to work with the agency on the “complex accounting, financial reporting, independence, and auditing issues” that arise as the economy goes into partial shutdown over the pandemic.

While the SEC signaled its willingness to allow variations in accounting for COVID-19’s financial impact, Teotia reinforced the need to provide full disclosure of material developments caused by the pandemic.

“As we face these challenging times, investors and other stakeholders need high-quality financial information more than ever,” he said in a public statement issued on Friday. “The proper functioning of our capital markets depends on a regular supply of high-quality financial information that enables investors, lenders, and other stakeholders to make informed decisions.”
The key areas he cited in which firms might have difficulty in providing precise data were:

  • Fair value and impairment considerations
  • Leases
  • Debt modifications or restructurings
  • Hedging
  • Revenue recognition
  • Income taxes
  • Going concern
  • Subsequent events
  • Adoption of new accounting standards (e.g., the new credit losses standard.)

The SEC said it has been working with the Financial Accounting Standards Board on how to report the estimated or actual impact of the virus and “is closely monitoring the impact of issues raised by coronavirus disease 2019 (COVID-19) on investors and global capital markets,” said Teotia. The SEC last month extended the temporary 45-day grace period for registrants impacted by the virus to report financial results required under the Exchange Act.

But while it has eased some reporting rules for affected companies it has warned firms to take extra precautions in managing sensitive data on the virus that could be used for insider trading, underscoring the need to divulge material non-public information on the virus as soon as it has been identified. The SEC and the Justice Department have reportedly launched investigations of senators who sold large amounts of stock after receiving information on the health threat not known to the public.

In addition to balancing reporting demands with safety concerns, the agency has also walked a line in implementing regulations. The agency last week said it would go ahead with a long-delayed implementation of Regulation Best Interest, Regulation CRS and investment adviser sales practice rules, citing the heightened need for investor protection in volatile markets. The move drew criticism as an undue hardship placed on an industry struggling to do business from remote locations.

The move drew support on Friday, however, from Democratic SEC Commissioner Allison Herren Lee, who said the approach taken by SEC Commission Chairman Jay Clayton put safety first in holding firms only to a “good faith effort” at compliance when the rules go into effect on June 30. But she called on the commission to “carefully analyze each action it takes in light of the altered economic and social landscape.” She said the agency should use “A careful balancing of interests…(in) regulatory action in the near term not related to the exigencies created by COVID-19.” Such actions, she said, “would rarely be warranted.”

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