COVID-19 - the impact on corporate reporting
Various regulators in the UK, the US and the EU have published statements over the last week in response to the unique circumstances arising from the Coronavirus (COVID-19) pandemic. The escalating crisis has led to uncertainty in companies’ financial positions, potential delays in providing financial information, and the need for auditors to undertake additional work to support their audit opinions.
In this briefing, we summarise some of the key points in relation to corporate reporting that corporates need to be aware of during this crisis, which are particularly relevant for corporates with a 31 December financial year end that are preparing to publish their audited financial statements within the coming weeks.
- FCA reporting deadlines (DTR 4.1): The UK Financial Conduct Authority (FCA) has published a policy statement (and a related Q&A to accompany the FCA’s statement) announcing temporary relief under which all listed companies that are required to comply with DTR 4.1 will be given an additional two months to publish their audited annual financial reports. The statement confirms that, provided an issuer publishes its audited annual financial reports within six months of its financial year end, it will not be expected to request a suspension of its securities if it fails to meet the requirement under DTR 4.1.3R to publish within four months of the financial year end. The FCA will also forebear from taking any steps to unilaterally suspend an issuer's listing for breach of DTR 4.1.3R (though it reserves the right to take this action, if necessary, for other reasons). The FCA encourages all companies that feel it appropriate to utilise the additional two months to do so and urges market participants not to draw undue adverse inferences when companies make use of the extra time the temporary relief gives. The FCA will also give temporary relief from taking action against companies that are not required to comply with the transparency rules but are subject to the requirement to publish annual financial reports via other Listing Rules, including LR 9.2.6BR, LR 14.3.23R, LR 18.4.2R and 18.4.3R.
- Restrictions on FCA temporary relief: The temporary relief announced by the FCA does not extend to issuers with a home state under the Transparency Directive that is not the UK; or to half yearly financial reports (which should be published within three months of the half year end in accordance with DTR 4.2).
- Preliminary financial statements: On 21 March 2020, the FCA published a statement requesting companies observe a moratorium of at least 2 weeks on the publication of their preliminary statements of account. The FCA has confirmed that the moratorium can end on 5 April 2020.
- Transparency Directive reporting deadlines: The European Securities and Markets Authority (ESMA) has issued a public statement indicating that it expects national competent authorities during this specific period related to COVID-19 to exercise forbearance against issuers in respect of the deadlines set out in the Transparency Directive regarding annual financial reports referring to a year-end occurring on or after 31 December 2019 but before 1 April 2020, for a period of two months following the Transparency Directive deadline; and half-yearly financial reports referring to a reporting period ending on or after 31 December 2019 but before 1 April 2020, for a period of one month following the Transparency Directive deadline. ESMA also encourages national competent authorities to generally apply a risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of applicable legislation in the area of the Transparency Directive concerning the publication deadline of financial reports, while highlighting that issuers are expected to exercise their best efforts to prepare their financial reports and publish them within the legislative deadline. Issuers that fall outside the scope of the Transparency Directive will need to have regard to the financial reporting requirements under national legislation in the relevant jurisdiction.
- SEC reporting deadlines: The US Securities and Exchange Commission (SEC) has extended the period for its conditional exemptions from reporting and proxy delivery deadlines for public companies, funds and investment advisers affected by COVID-19. For public companies, this SEC Order provides them with a 45-day extension for filing certain disclosure reports (for example, annual and quarterly reports) that would otherwise have been due between 1 March and 1 July 2020. This Order replaces an earlier similar Order made on 4 March covering a shorter period between 1 March and 30 April. SEC-reporting companies have varying filing deadlines according to their size – for example, annual reports for US companies are due 60, 75 or 90 days after the year end depending on the size category of the company.
- Wider impact: Corporates should consider the impact of any temporary relief on obligations in their bond and loan documents related to delivery dates for financial statements; and approach lenders or underwriters to explore the possibility of applying any temporary relief to the contractual requirements set out in the loan or bond documents. They should also be mindful of any contractual obligations to share with lenders or underwriters copies of documents sent to shareholders, bondholders or other creditors.
- Guidance on preparing financial statements: The UK Financial Reporting Council (FRC) has published guidance for companies preparing financial statements and a bulletin for auditors covering factors to be taken into account when carrying out audits during the current COVID-19 crisis. The guidance for companies includes advice to boards on how to manage a range of issues in light of COVID-19, including financial statements, dividends and capital maintenance, risk management, information management and corporate reporting and strategic reports. It addresses the difficulties companies currently face in making forward-looking judgements in their financial statements: for example, in strategic reports and viability statements, with a focus on appropriate disclosure of material uncertainties and going concern issues.
- UK Companies House filings: Companies House has announced that businesses on the Companies House register will be able to apply for a 3-month extension for filing their accounts with Companies House as they deal with the impact of COVID-19. The extension will be automatically and immediately granted via a fast-track process, if COVID-19 is cited as the reason for delay. This will, for example, permit applications for delayed filing of financial statements for subsidiary companies of listed entities. Extension applications should be made before the filing deadline. Companies that have already extended their filing deadline, or shortened their accounting reference period, may be ineligible for an extension.
- Market abuse: Regardless of the above temporary relief relating to financial reporting deadlines, companies are still obliged to keep the market up to date with information during this period. In the EU, the Market Abuse Regulation (MAR) remains in force and companies are still required to fulfil their obligations concerning inside information as soon as possible unless a valid reason to delay disclosure under MAR exists. Companies must continue to assess carefully what information constitutes inside information, recognising that the global pandemic and policy responses to it may alter the nature of information that is material to a business’s prospects. ESMA has published a statement recommending that, in order to comply with their transparency obligations under MAR, issuers should disclose as soon as possible any significant information relating to the impacts of COVID-19 on their prospects or financial situation. In the UK, the FCA has published Primary Market Bulletin 27, confirming that it expects issuers to continue to comply with the current rules to ensure appropriate disclosure continues, in order to allow investors and the market to continue to price securities effectively. In the US, the SEC has reminded companies, directors, officers and other insiders of the need to refrain from trading prior to the dissemination of material non-public information (for example, where COVID-19 has affected a company in a way that would be material to investors or where a company has become aware of a risk related to COVID-19 that would be material to investors). The SEC has also reminded companies to avoid selective disclosures by disseminating any material information related to the impacts of COVID-19 broadly to the public.
- Timely disclosure: The situation has escalated quickly and is evolving week by week – listed issuers will need to consider the extent to which developments will need to be disclosed to the market, either by way of market announcements or (in the context of debt issuance programmes) prospectus supplements.
- SEC guidance: The SEC’s Division of Corporate Finance has issued guidance on COVID-19 related disclosure and other relevant securities law obligations. The guidance gives a helpful checklist of questions companies should ask themselves when preparing disclosure, addresses insider trading concerns and discusses considerations for preliminary results/earnings releases. On earnings releases, the SEC Staff indicates some flexibility on using APMs (non-GAAP financial measures) where a GAAP financial measure is not available at the time of the earnings release because the measure may be affected by COVID-19 related adjustments needing more information and analysis to complete.
Breach of covenant
- Considerations for lenders: In the UK, a joint statement issued by the FCA, FRC and PRA urges lenders to exercise careful consideration when responding to potential covenant breaches arising directly from the COVID-19 pandemic and its consequences. Loan covenants are fundamental from a risk management perspective for lenders, but lenders should be mindful that the common goal is that the financial system should support businesses and the economy during this challenging period. The PRA expects lenders to consider the need to treat covenant breaches that arise from COVID-19 related matters that are of a general nature or are firm-specific but unrelated to the solvency or liquidity of the borrower differently compared to uncertainties that arise because of borrower-specific issues. The expectation is that they would consider waiving the resultant covenant breaches which may occur due to the pandemic, such as delays in providing financial statements. Waivers should be granted in good faith and should not impose new charges or restrictions on borrowers following a covenant breach that is unrelated to the facts and circumstances that led to that breach.
- Considerations for corporates: Any financial covenants in bond or loan documentation will need to be carefully monitored. Corporates should be mindful of the PRA expectations of lenders (described above) when entering into COVID-19 related discussions with lenders.
- Deferral period: For equity listed issuers, the LSE has announced that it will permit a deferral period of up to 30 business days for payment of a dividend, meaning that payment can be up to 60 business days after the record date. Issuers must inform the Stock Situations Team of any deferral without delay.
- Timetables: Corporates should review all elements of their timetables for publication of financial information, in order to make appropriate use of the time available within regulatory deadlines to ensure accurate and carefully prepared disclosures.
- Audit engagement: The FRC has provided guidance on carrying out audit engagements that are affected by COVID-19. The FRC has recommended postponing auditor tenders, even when mandatory rotation is due (noting that the FRC is empowered to extend certain mandates by up to two years in exceptional circumstances); and where there are good reasons, the FRC has stated that rotation can be extended to no more than seven years with the agreement of the affected entity's audit committee (for example, to maintain audit quality in current circumstances).
- Diligence: Listed companies seeking to access the capital markets should expect to see increased diligence requests relating to the COVID-19 pandemic; and an increased focus by regulators on disclosure (risk factors in particular). Loan agreements will typically require the provision of information in relation to the financial condition, business and operations of any member of the group if reasonably requested by any finance party; corporates may well see an increase in requests for such information, as lenders seek to understand the impact of the crisis on working capital and cash flow.
- IFRS 9: ESMA has published this ESMA guidance on some accounting implications of the economic support and relief measures adopted by EU member states in response to COVID-19 (some of which include moratoria on repayment of loans and have an impact on the calculation of expected credit losses in accordance with IFRS 9). In the UK, the PRA has issued this guidance regarding the approach that should be taken by banks, building societies and PRA-designated investment firms in assessing expected loss provisions under IFRS 9.
- Company law: Companies will, regardless of any regulatory forbearance related to publication of audited financial statements, still need to mindful of any requirements that apply under national company law.
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For more detail and practical tips on managing the impacts of COVID-19, please see updates in the Freshfields Coronavirus alert hub.