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Business News/ Companies / News/  Companies are grappling with how to report coronavirus risks
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Companies are grappling with how to report coronavirus risks

wsj

Challenge lies in disclosing details of future impact in financial filings, when information about the current outbreak is evolving

A market employee wearing a mask to prevent contracting the coronavirus waits for a customer at a market in Seoul, South Korea. (Reuters)Premium
A market employee wearing a mask to prevent contracting the coronavirus waits for a customer at a market in Seoul, South Korea. (Reuters)

Companies are puzzling over what to tell investors about how the still-developing global coronavirus outbreak could affect future performance.

The outbreak has disrupted supply chains, closed stores and resulted in quarantines across the globe. For many companies, the outbreak has coincided with deadlines for filing annual reports due in March, and decisions about filing paperwork for initial public offerings.

Typically, the risk disclosures in these filings would contain information on factors that could materially affect their financial operations. Companies are drafting language to explain how the outbreak could affect their future operations, securities lawyers said. The challenge is providing investors with accurate information about the future when information about the outbreak is changing by the day.

“When there is a threat that has never been analyzed before, how it can impact a business—that is a very difficult challenge to get it right," said Tom Sporkin, a former U.S. Securities and Exchange Commission lawyer who is now a partner at Buckley LLP.

And, the cost of not getting it right is high. Companies could face lawsuits from investors if they aren’t sufficiently forthcoming about their financial ties to infected regions, or if they describe the virus as a hypothetical risk when it has in fact affected operations, lawyers said.

“You want to give a feel of likely outcomes, even though you can’t know exactly where this is going," said John Bason, the finance chief at Associated British Foods PLC, the U.K.-based owner of Twinings tea and other grocery brands.

Deciding what to disclose depends on what companies view as financially material. In the case of coronavirus outbreak risks, a big part of that calculation so far has involved looking at a company’s business ties in China, where the outbreak began. Another important factor is the type of insurance coverage that companies have to cover business disruptions, according to David Martin, senior counsel at Covington & Burling LLP.

But the scope of risk can expand as the outbreak spreads.

Associated British Foods earlier this week sent a detailed statement to investors on its exposure to the outbreak, and how it is working to mitigate risks related to it. The statement required the company’s management team to examine the outbreak’s possible impact on the economy and the supply chains of the U.K. conglomerate’s business units.

The company sought to address short-, mid-, and long-term risks and contingencies. It noted that it is operating food-processing factories in China at reduced capacity. It sought to reassure investors by saying its Primark fast-fashion unit had built up inventories in advance of the Lunar New Year and, as a result, ABF doesn’t expect any short-term impact. The company also said it is looking for alternative suppliers to prepare for the potential of a prolonged slowdown in garment production.

“The ramifications have become huge," Mr. Bason said.

Over the past few days, the virus has spread across Europe, and infections have increased in Iran and South Korea. U.S. health officials, meanwhile, said Tuesday that they are preparing for a potential pandemic.

Regulators have reminded companies about their obligation to disclose business risks.

“Where mitigating actions can be taken, these should also be reported alongside the description of the risk itself," the Financial Reporting Council, U.K.’s audit and accounting watchdog, said in a statement last week aimed at companies with operations or close trading links in China.

The chairmen of the SEC and the Public Company Accounting Oversight Board in a joint statement urged public companies to work with their audit committees and auditors to ensure that financial reporting, auditing and review processes “are as robust as practicable in light of the circumstances," noting that the way companies are managing risks stemming from the virus could be relevant to investors.

Corporate disclosures about coronavirus outbreak risks so far have varied widely, though many have provided a glimpse of the potential impact of a larger pandemic.

Leather-goods retailer Cole Haan Inc. said in its IPO paperwork this month that the outbreak could affect its sourcing and manufacturing, among other factors. One of the company’s distributors operates 18 stores in China, some of which had closed as of Feb. 14, according to its filing.

United Airlines Holdings Inc. said in its annual report earlier this week that the company’s performance will depend, in part, on the duration and spread of the outbreak, as well as any future travel advisories and restrictions. The company has suspended flights between the U.S. and Beijing, Chengdu, Shanghai and Hong Kong from February through April 24, according to the filing.

Hancock Whitney Corp., a regional bank in Gulfport, Miss., said in its annual report filed Tuesday that the outbreak could affect oil and gas markets, and could have a negative impact on energy loans, which account for 4.5% of its total portfolio.

One factor that would likely improve the quality of disclosures is more scientific information about how the virus is spread, according to Alice Hsu, a partner at Akin Gump Strauss Hauer & Feld LLP. That would put companies in a better position to assess the future risks, she said.

“When the scientists get a little more information on how to address it, then I think companies will be in a better position to respond," Ms. Hsu said.

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