Earlier this year, I wrote about the practice of presenting “EBITDAC”- type disclosures that adjust for COVID-19’s impact. A more recent blog from Liz suggests that this practice is growing in popularity. Clearly, disclosures about the effects of COVID-19 are very important, but non-GAAP disclosures that include estimates of lost revenue from the pandemic aren’t likely to make you many friends at the SEC.
Unfortunately, the quantitative disclosures about COVID-19 that can raise compliance issues aren’t limited to EBITDAC, and guidance about where to draw the line has been hard to come by. That’s why a recent Cleary Gottlieb memo about disclosures quantifying COVID-19’s impact is a very helpful resource. This excerpt addresses potential concerns about the accuracy and verifiability of COVID-19 adjustments:
Not all adjustments are created equal. Adjustments stemming from fairly objective charges, such as COVID-related contract terminations or purchases of personal protective equipment, are easier to isolate, quantify and support than charges related to supply chain interruptions and operational inefficiencies, which may reflect drivers beyond COVID-19. The more judgment calls that are needed in a company’s assessment of an adjustment, the more the company should consider its assumptions.
The SEC may be more likely to question the accuracy of the disclosure during its normal-course review of the company’s periodic filings, and there is also litigation risk surrounding COVID-impact disclosure that contains a misstatement or is otherwise inaccurate or unsupportable. In addition, it may be difficult for auditors to comfort such an adjustment in an underwritten offering. such as COVID-related contract terminations or purchases of personal protective equipment, are easier to isolate.
Through a user-friendly format that incorporates Q&As and concrete examples, the memo also provides insight on determining whether or not a particular disclosure involves a non-GAAP financial measure, whether the disclosure is permissible or potentially misleading, and other matters.
-John Jenkins, TheCorporateCounsel.net July 6, 2020