Global events over the past quarter have had and continue to have a variety of disparate impacts on public companies. Below are some selected disclosure reminders to keep in mind for the upcoming quarterly reporting season, which is likely to play out against the backdrop of a volatile and uncertain market environment.
Forward-Looking Statements
Perhaps more than ever in light of the dynamic situation in Washington, investors will be keenly focused on companies' expectations for the balance of the fiscal year. To that end, companies should take a fresh look at their forward-looking statements and accompanying forward-looking statement disclaimer language.
The Private Securities Litigation Reform Act of 1995 (PSLRA) offers a safe harbor that requires that companies provide "meaningful cautionary statements" that identify factors that could cause results to materially differ from those discussed in the forward-looking statement.
Companies should carefully review language about their expectations, ensure that appropriate qualifications and assumptions are reflected where necessary to clearly communicate management's expectations, and confirm that reasonable support exists for the expectations described. Companies may want to ensure that they are comparing forward-looking statements against the company's forward-looking statement disclaimers to identify areas for enhancement, including expanding the descriptions of potential risks that could affect whether forward-looking expectations materialize.
Companies should also consider how forward-looking statements might evolve over the balance of the year and whether that informs the approach taken to disclosures to be made this quarter. Relatedly, for companies that have a practice of issuing annual financial guidance, consideration should be given as to whether that guidance remains supportable and any disclosure considerations that follow if it is not, including withdrawing or updating guidance.
Risk Factors and MD&A
Related to the points described above, companies should also take a fresh look at their previously identified risks and consider whether any new risks have emerged or if existing risks have evolved in a manner that requires further clarification. For instance, the recent imposition of large-scale tariffs and the impact of ensuing retaliatory tariffs, proposed changes to the tax code, geopolitical tensions including developments in the Ukraine-Russia and Israel-Hamas wars, executive orders with potentially significant implications for certain industries, reductions in staffing and other structural changes within government agencies, and unusual weather and other natural events such as the wildfires in Los Angeles are some recent events that may warrant disclosure updates. Such updates may be made in the form of new or amended risk factors or in updates to Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A).
Form 10-Q, Part II, Item 1A requires that companies "[s]et forth any material changes from risk factors previously disclosed in [its] Form 10-K," with an exception for smaller reporting companies. Determining whether a development materially changes the risk factors addressed in the Form 10-K is a case-by-case analysis. If a development does not represent a material change from the risks disclosed in the Form 10-K but perhaps implicates the business or adds color to a previously disclosed risk, a discussion of the development in MD&A may be more appropriate. On the other hand, if new risks have emerged that were not previously disclosed in the company's Form 10-K, consideration should be given to adding a new or revised risk factor in the Form 10-Q.
Among other topics, MD&A should disclose "material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition." Those disclosures can complement existing risk factor disclosures and should not be inconsistent with the articulated risk factors. In addition, companies should be mindful of the disclosures provided in earnings releases and on earnings calls and should ensure that any material events and uncertainties reflected in those supplemental disclosures are also reflected in MD&A.
Financial Statement Considerations
As it relates to tariffs and other trade- and tax-related matters in particular, companies will need to assess whether any accounting considerations are implicated depending upon the effects on each particular company. Such macroeconomic events can often trigger requirements to perform additional accounting analyses, and companies and their accountants should stay closely attuned to fair value, impairment, tax contingencies, going concern and other potentially relevant accounting considerations. Audit Committees, as part of their oversight responsibilities, should be sure to ask management whether and how they considered the impact of tariffs and other trade- and tax-related matters on the company's financial statements, including whether any impairment or other analyses have been or are likely to be triggered.
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