Second Quarter 2020 Amid COVID-19: Investor and Audit Committee Considerations
First-quarter 2020 presented reporting challenges for US public companies. US companies — unlike global companies with only half-yearly reporting — were faced with the challenge of reporting as the pandemic commenced and initially peaked. Though the United States experienced a later onset of the virus, US companies faced earlier reporting obligations. We wrote about these obligations in a variety of posts in our series First Quarter 2020 Amid COVID-19:
Can US Companies Report? Will Companies Report?, US Quarterly vs. Global Half-Yearly Reporting, Non-GAAP Measures, and Big Banks Report.
The US securities regulators issued numerous publications that reminded companies to provide transparency on the effects of the virus and encouraged forward-looking information that helped investors and global policymakers to understand the effects of this impact. Globally, however, regulators allowed deferral of the release of yet-to-be-completed annual reports putting US companies at the forefront of the reporting process.
US First Quarter: A Tale of Two Quarters
The first quarter was a tale of two quarters with a relatively normal January, February, and early March followed by the shutdown of the US and the global economy in the second half of March. Anecdotally, we found most companies provided limited forward-looking information and instead focused on the historical first quarter with nuggets of information released on actual events in April and May during analyst calls. Examples include JP Morgan communicating worsening GDP and unemployment expectations in April 2020 compared with those used in their March 2020 financial statement assumptions; Union Pacific speaking about “an embarrassingly large number of locomotives” shuttered in April; and Warren Buffett explaining he sold his airline stocks in April at his May annual shareholders meeting. Nearly all companies issuing guidance for 2020 pulled it rather quickly in March and April.
US Second-Quarter and Global Half-Yearly Results: Our First Real Look at the Damage
The second quarter, ending June 30, will result in US companies providing investors with the first look at the actual impact of COVID-19 on US public companies; and globally, companies will release their half-yearly results for the first time since the global surge in the pandemic. As this earnings season commences, we will be listening for a variety of issues. Our ears will be tuned in not only to a discussion of the historical results but also to management’s assessments of the future. We thought it would be useful to share our perspectives for both investors and the audit committees meant to serve the interest of investors.
As the earnings season commences this week, we will undertake a series of posts over the next two weeks on issues we believe are important for investors and audit committees to consider including cash and liquidity, going concern, evaluating the business, accounting considerations, and non-GAAP measures, to name a few
Our objective is not to provide an extensive instructive discussion of the details of, for example, the accounting considerations – as the accounting firms have written volumes on the accounting nuances which accountants must consider – but rather, to provide an overview on what and how investors may want to think about these issues from an economic and fundamental analysis and company valuation perspective. We will reference some of the more detailed publications from a variety of sources that we have found interesting and useful over the past few months that will allow investors to dig deeper into the issues they find most relevant to the companies they are evaluating.
Our consideration of the issues is meant to be globally applicable to the nature of these items. We aim to be as agnostic as possible to, for example, the accounting differences between International Financial Reporting Standards and US GAAP. That said, we illustrate differences and highlight what we have learned during the first quarter of 2020 in the United States.
We will compile these posts into a publication that we will post to our website in the coming weeks.
Image Credit: © 2020 CFA Institute
