Having More Meaningful and Effective Communications with Stakeholders During COVID-19

As companies prepare to report another quarter of doing business in a pandemic, they have the benefit of drawing on the experiences and lessons learned from the last two quarters. It is important that companies reflect on the lessons learned and foresee what financial reporting issues may lie ahead, the accounting topics that are going to be trending, the related challenges that will arise and ways to resolve them in order to avoid business disruption and continue creating value.

A recurring theme of the myriad of financial reporting issues associated with COVID-19 is the need for robust and transparent disclosure and communication. Given the continuous and rapidly evolving economic impact of the pandemic, management should consider how it can provide timely updates to stakeholders and investors regarding the pandemic’s current and future impact on the company, as well as share plans, to the best extent possible, to evolve and thrive regardless of industry.

There are three broad-based categories of communications that companies should focus on, especially as they are wrapping up Q2 and hurtling towards Q3: transparent disclosures regarding key assumptions and critical estimates, communications around non-GAAP measures, and effective COVID-19.

Transparent disclosures regarding key assumptions critical estimates

No one can predict the future. We don’t have answers yet to how long the pandemic will last, when a vaccine will be available, or what the economy will look like a year from now. Scenario plans for 2020 along with planning for the future may not seem like an effort worth the time as companies may find themselves compelled to reforecast constantly. In many cases, planning for the unknown will involve developing multiple scenarios, including worst cases, and putting in place a rolling 12-month forecast that will likely need to be revised more regularly than in the past.

But in order to recover and thrive in the future, companies will need to become more comfortable with forecasting amidst so many unknowns and disclosing key assumptions and critical estimates as it relates to the company’s financial reporting.

Non-GAAP measures
Non-GAAP disclosures were not common for the quarter ending March 31, 2020. For many companies, COVID-19 had not registered a significant impact at that time as business lockdowns and company shuttering had only been enacted for about the last two weeks of the first quarter. In the second quarter, COVID-19’s impact played out over the full quarter, and similarly for the third quarter, we may see non-GAAP measures more widely used.

When providing non-GAAP measures, a general concept is, such measures should not be misleading, such as removing recurring cash operating costs. Often a company may remove unusual and non-recurring items when presenting non-GAAP measures. But now we are in the ‘new normal,’ prompting many to ask: what is unusual and non-recurring at this point? The pandemic has brought about unusual changes, including how and where employees work, financial market volatility, customers social distancing, and government intervention.

Companies are now also spending additional money on cleaning supplies, protective equipment, etc. to make their facilities safe for employees to return to work – a new cost to operating in today’s environment. Initially, these may have been treated as one-time or temporary expenses, but some companies may be incorporating such types of expenses with the new normal of doing business and may view such costs as a more permanent fixture. This is where companies need to exercise judgment to define what is unusual or will become usual activity. No one has a crystal ball, but some costs that were previously considered unusual, such as additional cleaning and disinfecting costs is now becoming a staple for daily business operations. Costs related to impairments, facility shutdowns, contract terminations and employee termination costs, along with government grants or insurance recoveries are likely to be some of the more common non-GAAP adjustments companies will need to consider as the pandemic drags on.

Along with reporting non-GAAP measures, keeping stakeholders apprised of certain COVID-19 related costs and impacts  and determining whether such costs could be incurred again in the foreseeable future because of the pandemic, will be important.

Crafting your COVID-19 story
The COVID-19 pandemic has touched all industries and sectors, and literally no company has been immune to its impact. As a result, companies must know how to effectively  communicate with their stakeholders about the risks the company is facing in the near and long term, what it will do to mitigate a crisis, and its plans to thrive in the future.

A company’s COVID-19 story can be categorized into three buckets: respond, recover, and thrive. Stakeholders and investors alike want to understand a company’s journey since the pandemic began, i.e. the respond and recovery stage. They want to know how the company adapted to the new restrictions and made it work, how it ensured employees remained safe and how it implemented business continuity plans to keep operations flowing smoothly and maximize performance during the pandemic. Stakeholders need to have a clear picture of any business threat the company is envisioning and how it is planning to change and evolve to be stronger in the future.

Telling a company’s COVID-19 story – whether through press releases, investor or analyst meetings, presentations, etc. – will continue to be important in quarterly reporting, as will contextualizing this against the outlook of the sector in which it operates. The ability to properly communicate this to stakeholders and act on it inevitably means that some companies will come out stronger than others – and will be able to foster even greater confidence among investors and stakeholders.

In summary, even though the COVID-19 pandemic is a global crisis, responses continue to be very localized. Considering so many unknowns and decentralized response mechanisms, management teams may be inclined to say less to avoid speculation or panic. But in today’s environment, the absence of updates is likely more troublesome, as stakeholders expect companies to communicate more frequently, not less. Leading organizations will find the right cadence for communication of critical estimates and assumptions used to develop financial information, non-GAAP measures, and storytelling to help them keep critical business stakeholders abreast of the company’s operations while also shoring up resiliency in the business itself.

Eric Knachel is a senior consultation partner in the National Office of Accounting and Reporting Services Deloitte & Touche LLP.