U.S. companies faced with a later onset of the COVID-19 virus are also confronted with an earlier reporting obligation than companies in other jurisdictions who have a half-yearly, rather than quarterly, reporting obligation.
While in jurisdictions outside the United States, 2019 annual accounts are being delayed by regulators and half-yearly reports will not be due until late summer — and will likely serve more as after-action reports rather than value relevant information — U.S. companies are scrambling to produce meaningful first-quarter results in the form of earnings releases, Form 10-Q filings, or both.
The quarterly versus half-yearly reporting debate is currently in full view and regulators’ statements highlight how this reporting obligation is important not only to investors but policymakers. We believe this quarterly reporting obligation, if met well, will show the U.S. market provides more value- relevant and decision-useful information for investors and policymakers.
We also believe investors and policymakers globally will utilize the information obtained from the United States to understand the implications of the pandemic on companies, and human capital, globally.
These past two weeks, U.S. investors faced the commencement of the earnings season. Investors will be assessing what information companies will be providing in these earnings releases — and then considering what is likely to be forthcoming in Form 10-Qs. For several reasons, historical earnings aren’t what investors are likely to be most focused on during this reporting season.
First, the quarter will include two months, or slightly more, of “business as usual” results with only the month of March being unusual. As such, normalized measures such as earnings before interest, taxes, depreciation, and amortization (EBITDA) are not particularly useful in the predictive efforts of analysts and investors.
Second, investors will be focused on the highly uncertain elements of future results, not the more certain historical results represented by non-GAAP measures of EBITDA.
Updates from companies preserve an orderly market by replacing worst-case assumptions with more nuanced, even if not perfectly reliable, information.
Third, investors will, or should, focus on balance sheets and cash flows. In this moment, communication to investors in earnings calls should be more focused on future viability rather than historic profitability. Even if forward-looking information is not included in such earnings releases, U.S. securities laws that govern the filing of Form 10-Qs necessitate that companies consider the need to update all elements of the annual Form 10-K. That includes a discussion of the business, analysis of risks, discussion of liquidity and capital resources, and a robust management discussion and analysis (MD&A).
While we recognize that some companies have pulled guidance and that previous guidance is likely irrelevant, investors are interested in how management envisions the COVID-19 outbreak playing out for their business. As we learned during the 2008-2009 financial crisis, delaying or deferring transmission of information to the market can be more detrimental than providing even limited reliable information. Updates from companies preserve an orderly market by replacing worst-case assumptions with more nuanced, even if not perfectly reliable, information. The markets remain open, and such information is essential.
We laud the numerous official and unofficial statements by U.S. Securities and Exchange Commission Chair Clayton as well as the March 25 disclosure guidance published by the SEC’s division of corporation finance and the April 3 statement from the SEC’s Chief Accountant regarding high-quality reporting. As chair Clayton notes in his April 2 statement:
As Chair Clayton and Corporation [Finance] Division Head Hinman note in an April 8 statement, investors — as well as the public and private sector — need forward-looking information to assist in managing the impacts of the pandemic on the US economy. We excerpt key highlights below, but a full reading is essential for company CFOs:
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
Investors Are Not the Only Ones Who Are Interested in How Companies Will Adjust Their Affairs as We Pursue our Collective Fight Against COVID-19.
The SEC in its numerous statements has asked for companies to avail themselves of the forward-looking safe harbors of the securities laws to provide information useful to investors. But in this statement, they are highlighting such information is needed by the private and public sector collectively to assist policymakers in the management of this crisis.
Again, we laud the SEC for their efforts and encourage companies to provide insights in the fight against this pandemic and its impact on our health and the economy.
Sandra Peters Senior is head, global financial reporting policy, at CFA Institute.