First Quarter 2020 Amid COVID-19 Outbreak: US Quarterly vs. Global Half-Yearly Reporting
US Quarterly Reporting Obligation Will Provide Global Investors with
Decision-Useful Information on Impacts of COVID-19
US 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. US regulators are reminding issuers of their reporting obligations, while regulators in other jurisdictions delay year-end 2019 financial statements. Further, in these other jurisdictions half-yearly reporting will only occur late summer – when hopefully, God willing, the worst of the pandemic is behind us. The US quarterly reporting is likely to begin next week. In an August 2018 tweet, President Trump asked the US SEC to study eliminating quarterly reporting. The SEC study is not yet finalized. Below, we describe how these different reporting requirements – amid the timing of the COVID-19 pandemic – demonstrate the stark contrast between the information and its timing that US investors will receive and those in other jurisdictions. It is our view that US markets will provide investors globally with insights on the impact of COVID-19 and that quarterly reporting, though difficult, provides market-relevant, even if not perfectly reliable, information. Half-yearly reports, in contrast, will likely be interesting after-action reports, but investors need timely information as markets to remain open and information is essential to investment decision-making.
SEC Does Excellent Job Reminding US Public Companies of Investor Reporting Obligations
On 25 March 2020, we posted a blog, First Quarter 2020 Reporting, considering the implications of COVID-19 on the timing of first-quarter reporting. The U.S. Securities and Exchange Commission (the Commission), that very morning, released a revised order extending the 4 March 2020 original order we mentioned in the post. Simultaneously, the Division of Corporation Finance (The Division) published a document, CF Disclosure Guidance Topic 9 (the Guidance). Though not legally binding guidance from the Commission, the Guidance is helpful for issuers on their responsibilities regarding disclosure of material non-public information. On 2 April 2020, SEC Chairman Clayton released a statement, at a Special Meeting of the Investor Advisory Committee, encouraging the release of market-relevant information by companies in a timely manner.
I want to thank my colleagues in the Division of Corporation Finance for their proactive and investor-oriented approach to the pending earnings period. 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.
Following up on this, SEC Chief Accountant Sagar Teotia released on 3 April 2020 a Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19. It emphasized their interactions with accounting and auditing regulators and reiterated comments of Chair Clayton regarding the need and ability to provide investors with the high-quality financial information they need to make decisions amidst uncertainty.
We laud the SEC for offering this conditional, tailored relief that puts the health and safety of individuals first while encouraging the release of timely and relevant information to the market in this time of uncertainty. As we note in our earlier post, delaying or deferring transmission of information to the market will likely 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 information is essential.
The SEC has done what it can to encourage companies to provide the information investors need and that is required to be provided under the US securities acts. Now it will come down to company application of the rules and adherence to the Guidance. Investors role will be to review the disclosures and ask questions to ensure an effective transmission of the information to the market.
Actions by Regulators Outside the US
Annual Reporting – In our 25 March 2020 blog, we highlight (and include links to) recent actions by regulators in Hong Kong, the United Kingdom, and Europe related to financial reporting amidst the COVID-19 pandemic. The UK and European regulator releases relate to providing guidance on the deferral of year-end 2019 financial statements due for release in these jurisdictions in March/April. While many companies have reported their year-end 2019 results already, those not yet released are being allowed an additional two months – that’s a May/June release date on their 31 December 2019 results. While certainly there will be subsequent events due to COVID-19 that impact, and require adjustment to, year-end amounts (i.e. type 1 subsequent events in US parlance), the deferrals simply delay the release of relevant information to the point where it will be more reliable but nearly entirely lacking in relevance. It seems regulators globally may have a greater focus on reliability, for companies and auditors, than relevance to investors. Investors will have little interest in these accounts by the time they are issued as the world has dramatically changed.
Interim Reporting – Further, as it relates to interim reporting in 2020, European companies are only required to prepare half-yearly reports, as is also the case in Hong Kong. UK companies, on the other hand, have the option of voluntary quarterly reporting. The UK FCA encouraged companies to delay their year-end preliminary announcements for two-weeks given the release amidst the rapidly unfolding shut-down of the global economy. We understand that – health and safety first. And, it takes time to consider rapidly evolving impacts. That said, we believe securities regulators in these markets need to emphasize that investors need the information to assess the consequences of the COVID-19 impact. Delaying the release of 2019 financial statements and awaiting half-yearly financial statements in the late summer leaves investors with a dearth of information regarding the impact of COVID-19 on the businesses of those in whom they invest.
Easing of Accounting & Reporting – Even more concerning is that we understand, anecdotally, that Japanese regulators and accounting standard-setters may “ease” requirements and allow companies to omit the effects of COVID-19 when making assessments of impairments and going concerned. To do so would damage the trust investors place in the financial reporting mechanism and its ability to provide both relevant and reliable information for investment decision-making. Investors will need to monitor whether this ultimately occurs.
Disclosure Reminder – We believe securities regulators in these jurisdictions should remind companies of their obligation to provide updates of material non-public information (i.e. some have) and to provide information that is decision-useful to investors. Otherwise, investors are not likely to gain insights into the impact of the COVID-19 pandemic until the point where the financials reflect an after-action report on the dramatic events of the first half-year. In the case of the UK FCA, where there is voluntary quarterly reporting, this may include encouraging the continued release of voluntary quarterly reports. The UK’s FRC Lab has published some excellent questions for companies to consider with respect to the effects of COVID-19 as they execute their reporting obligations. There is, however, no reporting obligation in which to include the information in response to the questions until the production of half-yearly interim financials.
US Company Quarterly Reporting: Decision-Useful Information for Investors
In the US, however, companies are scrambling to produce meaningful first-quarter results in the form of earnings releases and/or Form 10-Q filings.
For several reasons, as we highlight in our blog on non-GAAP measure considerations amid the COVID-19 outbreak, earnings releases aren’t what investors are likely to be most focused on during this first-quarter reporting season. First, the first 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 EBITDA for the first quarter 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. Third, investors will, or should, focus on balance sheets and cash flows. At this moment, communication to investors in earnings calls should be more focused on future viability rather than historic profitability.
The quarterly earnings call should be focused on current and future events rather than historical earnings. Even if not included in such earnings releases, the US 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 including discussion of the business, analysis of risks, discussion of liquidity and capital resources and robust management, discussion and analysis. We will cover these and other considerations in the next post.
The Guidance from the Division also reminds issuers about their reporting obligations regarding material non-public information and encourages the usage of the safe-harbor provisions of securities laws as it relates to forward-looking information. Something we support and agree with.
Relevance vs. Reliability: Usefulness of Information to US & Global Investors
In our advocacy efforts on behalf of investors, we continually stress the importance of the relevance and timeliness of information over its reliability. CFA Institute, and our members, have long been ardent supporters of quarterly reporting for this reason.
US companies faced with a later onset of the COVID-19 virus are also confronted with an earlier reporting obligation. And, even if companies in the US avail themselves of the ability to delay the filing of their Form 10-Q to the maximum extent possible – that being 29 June 2020 – investors in US companies will have vastly more information to assess the impacts of COVID-19 than investors in Europe, Hong Kong and the UK where interim reporting with the effects of COVID-19 will only be available in late summer – when hopefully, God willing, the worst of the pandemic is behind us. While those financial statements may be more reliable they will likely be substantially less relevant to investors.
Because of this, the US quarterly reporting obligation is an advantage for US investors, but it will also serve investors globally as the US discussion of COVID-19 effects will facilitate investor understanding of the effects in other jurisdictions – especially for US companies with global operations.