Investor Relations

Virus Lays Bare Corporate Reporting Debate

In this moment, communication to investors in earnings calls should be more focused on future viability rather than historic profitability.
Vincent RyanApril 23, 2020
Virus Lays Bare Corporate Reporting Debate

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.

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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:

  • Our investors and our markets thirst for information as a general matter. This is particularly the case in times of economic shock and uncertainty. Couple this fundamental premise with the reality that for COVID-19-related reasons issuers may not be able to file required quarter-end reports on time, and we have a challenge. Importantly, an inability to file required reports does not prevent issuers from issuing earnings releases and filing current reports on Forms 8-K.
  • I believe the conditional, tailored relief crafted by the division of corporation finance, coupled with their detailed guidance regarding COVID-19-related disclosure topics, will allow issuers to provide prompt, period-end earnings information, and information regarding their past and expected future efforts to address the effects of COVID-19, regardless of whether they are able to comply with filing deadlines. We encourage issuers to provide as much information as is practicable and stand ready to engage with them.

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  

  • … We encourage companies and their advisers to make all reasonable efforts to convey meaningful information — information that provides investors a level of insight that allows them to see the key operational and financial considerations and challenges the company faces through the eyes of management.

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

  •  This request that companies strive to provide, and update and supplement, as much forward-looking information as is practicable is driven by three primary considerations:  (1) the information will benefit investors, (2) market digestion of the information will benefit the company, and (3) the broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios will substantially contribute to our nation’s collective effort to fight and recover from COVID-19.

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

  • As discussed above, broad and extensive coordination across workers, firms, investors, and government officials will be critical to successfully emerge from this fight. The exchange of forward-looking information is essential to that coordination. As just one of the millions of examples, if the owner of an industrial laundry business becomes comfortable that the hotel industry is soon to pursue a credible plan for increasing activity, the laundry business may be less likely to furlough (or may plan to rehire) employees.

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.

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