In the coming weeks, most Finnish listed companies will be issuing the Q1/2020 releases and conducting analyst and investor calls. This is far from any routine quarter. The additional hurdle is that it may have been more troublesome to collect historical information than normally as people who are involved in preparing these releases are working from home offices and there have been no or only a few physical management or board meetings due to distancing rules given in response to the COVID-19 outbreak.
1. ESMA and SEC guidance on COVID-19
The European Securities Markets Authority (“ESMA”) gave general recommendation on March 11, 2020 urging the issuers to provide transparency on the actual and potential impacts of COVID-19 in the interim financial reporting (“March 11, 2020 ESMA Recommendation”):
“Financial Reporting – issuers should provide transparency on the actual and potential impacts of COVID-19, to the extent possible based on both a qualitative and quantitative assessment on their business activities, financial situation and economic performance in their 2019 year-end financial report if these have not yet been finalised or otherwise in their interim financial reporting disclosures.”
While the ESMA Recommendation is more generic in nature, the Finnish listed companies preparing their Q1/2020 releases may find helpful the recent guidance from the U.S. Securities and Exchange Commission (“SEC”) for US publicly listed companies. The more detailed guidance from SEC may be helpful to Finnish listed companies as to what issues the investors and analysts could be focusing on when analyzing the Q1 releases.
SEC Chairman Jay Clayton and Corporate Finance Director William Hinman issued a public statement just before Easter on April 8, 2020 (“April 8, 2020 Statement”) on how US public companies should address the current state in their upcoming quarterly releases. Two weeks earlier, on March 25, 2020, the SEC had issued guidance how to address the evolving impact of COVID-19 as regards specific disclosure items (“March 25, 2020 Guidance”).
According to the SEC, assessing and disclosing the impact of COVID-19 will be an individual exercise for each listed company. All listed companies, however, should focus on providing disclosures that will help investors evaluate the current and expected impact of COVID-19 through the eyes of management:
“Company disclosures should reflect this state of affairs and outlook and, in particular, respond to investor interest in: (1) where the company stands today, operationally and financially, (2) how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing, and (3) how its operations and financial condition may change as all our efforts to fight COVID-19 progress. Historical information may be relatively less significant.” – April 8, 2020 Statement
Below are a few practical points from the April 8, 2020 Statement, which the SEC urges US companies to include in their Q1/2020 releases:
- Financial standing of the company: Detailed discussion of the company’s current liquidity position and expected financial resource needs.
- How the company’s response to COVID-19 is progressing: The impact of COVID-19 on operations, including those resulting from the company’s efforts to protect worker health and well-being as well as customer safety. The impact of company actions and policies in this area may be of material interest to investors.
- How operational and financial conditions may change as the company’s response to COVID-19 evolves: This is challenging because governmental response strategies are in their incipient stages and are likely to change over time.
- Material financial aid: Whether a company is receiving financial assistance under COVID-19-related programs if such assistance has materially affected, or will likely materially affect, the company’s financial condition or results of operations.
The 25 March 2020 Guidance urged the companies to evaluate the COVID-19-related effects, whereby the companies should analyze the following topics:
- Impacts on financial condition: In light of changing trends and the overall economic outlook, companies should examine how COVID-19 will impact future operating results and near- and long-term financial condition. This analysis should consider whether COVID-19 will impact future operations differently than how it affects the current period.
- Impact on capital and financial resources: Companies should examine whether cost of or access to capital and funding sources, such as revolving credit facilities or other sources, have or are reasonably likely to change. Questions to consider here include whether sources or uses of cash otherwise have been materially impacted; whether there is a material uncertainty about the ongoing ability to meet the covenants of credit agreements; and if a material liquidity deficiency has been identified, the courses of action a company has taken or has proposed to take to remedy the deficiency.
- Balance sheets: Companies should examine how COVID-19 impacts assets reflected on the balance sheet and the company’s ability to timely value and account for those assets.
- Remote work arrangements: Companies should reflect on remote work arrangements, if applicable, and how if these arrangements have had an adverse impact on the ability to maintain operations, including financial reporting systems and disclosure controls and procedures.
- Travel and border closures: The companies should consider examining whether travel restrictions and border closures are expected to have a material impact on the ability to operate and achieve business goals.
- Simultaneous disclosure: In addition, the SEC also prompted companies to take necessary steps to avoid selective disclosure of material non-public information (MNPI), and advised companies to refrain from trading if the company is aware of a risk related to COVID-19, which would be material to investors, until such information becomes public.
- COVID-19 adjusted figures: If a company wants to present a non-GAAP financial measure to adjust for or explain the impact of COVID-19, it would be appropriate to clarify why management deems the measure useful and appropriate, and how it helps investors evaluate the impact of COVID-19 on the company’s financial position.
The SEC acknowledges in the April 8, 2020 Statement that detailed forward-looking statements can be challenging for a company to make as they are “unavoidably based on a mix of assumptions, including assumptions regarding matters beyond the control of the company” and “key drivers of future operational status and financial results — most notably, the time frames for current COVID-19 social distancing guidelines and other mitigation-related requirements — are not uniform and are likely to undergo material change.” The Statement further notes that “in light of these forecasting challenges, it may be tempting to resort to generic, or boilerplate, disclosures that do little to inform investors of company-specific status, operational strategies and risks. 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.”
3. ESMA and FIN-FSA guidance on COVID-19
First and foremost, the Finnish listed companies should take note of the March 11, 2020 ESMA Recommendation when thinking about their Q1/2020 releases. The Finnish Financial Supervisory Authority (the “FIN-FSA”) has not (as of today) provided any specific guidance on COVID-19 related issues as regards quarterly releases (but can advise the Finnish listed companies on a case-by-case basis). The lack of any public ESMA or FIN-FSA releases is why we thought that the recent SEC guidance on the topic could be helpful to Finnish listed companies.
However, on March 18, 2020 the FIN-FSA reminded (partially promulgated by the March 11, 2020 ESMA Recommendation), that as required by market abuse regulation, Finnish listed companies must issue a profit warning if their previously issued prospects are no longer probable and valid. The obligation to make public inside information based on Article 17 of the Market Abuse Regulation cannot be overlooked or delayed even under exceptional circumstances, such as the COVID-19 pandemic. The FIN-FSA also stated that where the prospects and their underlying fundamentals involve significant uncertainties, companies may refrain from issuing prospects in order to avoid giving misleading information. The FIN-FSA continued with a recommendation that the situation and its impacts are described transparently.
Ever since the FIN-FSA issued the reminder on March 18, 2020, a number of listed Finnish companies have withdrawn their guidance that was issued in connection with the annual financial statements release just before the COVID-19 outbreak. However, when withdrawing the earlier guidance, some Finnish companies did not provide further insight on the company-specific effects of COVID-19 pandemic e.g. to their business operations or financial situation. While it is easy to understand the uncertainties still prevailing, we believe the investors will carefully review the management’s comments on the company-level effects of COVID-19. While preparing interim financial reports, the companies should also bear in mind the various IFRS requirements, even if IAS34 would not be directly applicable to the company’s Q1/2020 report. In addition, events after the end of a reporting period will most likely require much more emphasis than normally, given the rapid changes in the global and local economy in recent weeks. The pandemic may affect a number of IFRS reporting requirements and principles, including but not limited to the impairment tests of fixed assets or goodwill, valuation of current assets, revenue recognition requirements or treatment of financial instruments in accordance with the IFRS 9 standard.
Borenius’ capital markets lawyers are available to assist in addressing any questions you may have regarding this legal alert. As a leading Finnish capital markets practice, we strongly benefit from our presence in London and New York, which enables us to have constant dialogue with the leading City and Wall St. experts.