COVID-Related Disclosures: Getting It Right

Many private companies are nervous about missing the mark on COVID-related disclosures, fearing they’re overlooking items. The guidelines on the topic for private companies aren’t as specific as those for public companies. In general, the Private Company Council (PCC) recommends that you should plan for the worst and hope for the best when drafting financial statement disclosures.

Be Proactive, Not Reactive

When drafting financial statement disclosures, companies generally try to be forthcoming about the items financial statement users are looking for. And private companies typically look to public companies to gauge a matter. But COVID-19-related events are unique, bringing new reporting issues for business owners and managers to grapple with.

The overall impacts of the pandemic trickle through the financial statements. Revenue, profits, cash flow, leases, rent concessions, debt restructurings and other balance sheet considerations may be affected. Some companies have decided to create new sections within their financial statements that haven’t historically existed to talk about risk, uncertainties and other concerns.

A Conservative Approach

The PCC discussion comes at a time when lenders are looking to understand the effects Small Business Administration-backed loans — such as the Paycheck Protection Program (PPP) and other COVID-related government funds — have on businesses.

“As a user of financial statements, I would like the disclosures to tell me what the next news may be. If there’s pending bad news maybe on the horizon related to COVID, I’d like to know that,” said Robert Messer, senior executive vice president and chief financial officer-chief risk officer at American National Bank of Texas. Like most lenders, Messer would prefer that his borrowers take a conservative approach and assume that they’ll have to repay any PPP loans, and then if a loan is forgiven, “we’ll have a happy day and slap each other on the backs.”

Last year, companies knew they needed to address any immediate going concern issues, such as an impending restructuring or liquidation. In 2021, the challenges are more likely to come from fluctuations in the incomes statement and assets that have become impaired. There’s also diversity in practice when it comes to classifying PPP loans.

Transparency Is Key

In general, private companies follow a more limited “red flag” approach for disclosures than public companies. That’s because private company stakeholders typically have greater access to management. But the current situation is unique.

Private companies that generate detailed financial statement disclosures — for example, explaining why revenue is down, expenses are up or other changes are expected during the pandemic — may be able to reassure stakeholders about a company’s future outlook and minimize questions from investors and lenders. Contact your Hood & Strong team to discuss the optimal level of disclosure for your company’s situation.