Considerations for boards:Responding to COVID-19

April 2020

www.pwc.ie/covid19

As COVID-19 continues to spread as a global pandemic, the business community is feeling unprecedented impacts. From concerns over employee well-being to massive supply chain disruptions to gyrating stock prices, businesses are experiencing a range of implications. Now more than ever, boards of directors need to be proactive and agile, and they need to respond with strong leadership.

Business Tax Policy1

Financial Reporting

Since there are numerous strategic, operational and policy concerns impacting both the short and long term, boards will want to immediately consider the following issues:

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Employee well-being. First and foremost, companies need to address their employees’ well-being. They need to address workforce safety and consider how to sustain remote working capabilities. The communication strategy needs to be factual, authentic and timely.

Workforce planning. Organisations need to rapidly identify tasks and roles (critical and non-critical) and backfill for key / pivotal roles. They will need to understand the likely impacts on employee population and where work levels are likely to increase / decrease. Employment Risk. Difficult decisions with a direct impact on employees may be required to protect the organisation. It is critical that there is clarity on the legal and internal policy landscape for decisions made and a robust and considered engagement plan will be required.

Impact on strategy. Considering the board’s responsibility for risk and strategy oversight, boards will want more frequent communications with management on the impact of COVID-19 on operations and the execution of strategic initiatives. In particular, they will want to have additional discussions about the need to pivot in light of current circumstances, changes to capital investment strategies, supply chain issues, workforce planning and cost reduction efforts.

Transactions, opportunism and activism vulnerability. If your company is currently in the midst of a transaction, access to information for diligence and pricing will be challenging. But while the deals market is uncertain, there will continue to be a very robust activism landscape. Lower equity valuations, once stabilised, may present an opportunity for hedge fund activists to take positions in companies that were less attractive to them at higher valuations.

The board will want to ensure management has considered how the decline in the equity markets could expose any such vulnerabilities, and understand the mitigation techniques available. To the extent a company desires to take advantage of lower valuations and pursue a transaction, the board should consider the risks associated with uncertain outcomes and potential diligence barriers.

Dividends and share repurchases. Many Irish and UK public companies have cancelled their 2020 dividends, due to the challenging economic environment, liquidity concerns and/or regulatory intervention. Boards will have decisions to make on dividends. With the global equity markets in extreme flux, boards that engage in share repurchases will want to look closely at current share repurchase programs. As equity valuations decline, some companies are considering modifying their approach to share repurchases. The timing of share repurchases is always challenging and directors will want to carefully think through these decisions considering company-specific facts and circumstances.

Supply chain. Supply chains continue to be disrupted in different ways. Some companies have excess supply or capacity, while others have shortages. Most companies did not have supply chain risk sensing tools, and had not modelled scenarios to deal with an event like we are now experiencing with COVID-19. Many are in triage mode, and the ability to balance supply with demand may be impacted for months to come.In the short term, boards should be asking whether there is sufficient liquidity for supply chain operations. They should also ask whether the company is proactively managing relationships with key suppliers and customers, some of whom may have contracts with “most favored” clauses.

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Business

There may also be potential supply disruption insurance coverage gaps given “force majeure” and related caveats that management will need to track. And extraordinary supply chain expenses need to be carefully documented for insurance/tax purposes.

In the medium term, boards will want to probe whether the company’s supply chain risk assessment and scenario modeling tools need to be upgraded. Boards should also be asking whether increasing workflow automation could mitigate future risk and if the supply chain operating model needs to be revisited.

Liquidity. Companies will need to take a close look at their future cash flows. Companies that might have already been close on operating cash forecasts or debt covenants will need an immediate plan of action. Depending on the industry, companies will see lower revenue resulting in less cash flow, delayed receivable collection, the need to pay payables faster to support key suppliers or related issues. Cash flow management will require close scrutiny in the months to come.

Cyber Risk. With increased remote working, especially by senior executives, a number of cyber risks and threats are emerging. Firstly, there has been a sharp increase in the number of phishing emails in circulation. These emails can appear to be COVID-19 updates, WHO guidance or charity vaccine donations; however, the associated links contain malware which can spread ransomware or steal personal data. Teleconferencing services can also permit adversaries to acquire sensitive information if not set up in a secure manner. Finally, remote working does increase the risk of confidential information being breached if PCs are left unattended, confidential discussions are over-heard or personal email is being used as a work-around. Increasing the awareness of cyber risk when remote working is the most effective mitigant to address these new threats.

Rapidly evolving circumstances and engagement. Governments have responded to this rapidly developing situation with specific proposals that warrant careful review by boards and management teams.

The proposals vary by country but commonly aim to protect the economic downturn. Additional legislative and administrative measures are likely to be developed. Companies should be prepared to engage with policymakers to ensure that issues and proposals affecting their business operations and employees are carefully considered. PwC is monitoring these measures in all territories globally; details of measures across all tax types in all jurisdictions can be accessed through the following easy to navigate link. National COVID-19 Income Support Scheme. The Irish Government response has been headlined by measures to support workers and employers temporarily impacted by the COVID-19 pandemic. These included enhanced illness benefit, and an enhanced unemployment payment (€350) which is also available to the self-employed.

The principal measure which is being widely availed of by employers is the Temporary COVID-19 Wage Subsidy Scheme (TCWSS) being operated by Revenue Commissioners. It is targeted at employers whose business is significantly impacted by COVID-19, but who continue to keep employees on the payroll and pay them. To qualify, employers must prove to Revenue's satisfaction that they are experiencing significant (25%) negative business impact due to COVID-19 over the period 14 March to 30 June 2020.

TCWSS came into effect from 26 March 2020. It allows employers to claim a subsidy for up to €410 per employee per week for 12 weeks. It operates via the employer payroll and will provide a refund to qualifying employers who continue to pay employees up to their normal take home pay.

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Tax PolicyBusiness (cont’d)

The subsidy is limited to 70% of the average take home pay of the employee and is capped at €410 with relief tapering out for higher salaries.

Employers are encouraged to top the payment up to the same level as the normal take home pay of the employee. If the employer is not in a position to do so, it is not required to.

Other Fiscal and Business Supports. There is a further range of supports available to Irish business from government and its agencies during the COVID-19 pandemic. These include other specific tax measures, a Working capital scheme, rates deferrals and many more. These measures have evolved and expanded over the past weeks, and will continue to do so. Non-executive directors should be asking management if they have availed of all supports available.

The full range of COVID-19 measures is covered here.

Non-executive directors should be asking management if they have availed of all supports available

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Tax Policy (cont’d)

Financial Reporting

Earnings guidance. With widespread economic impact on financial performance, companies have already begun modifying or withdrawing their earnings guidance and other projections. Communicating timely any material matters - even if the company does not yet have all of the details - is critical.

Financial reporting operations. As business continuity challenges escalate, companies may experience issues with “closing their books” on a timely basis. Audit committees should be aware of potential workforce issues, both domestically and internationally, and the company’s ability to meet original or modified deadlines. Ensuring that internal controls are still functioning effectively, even if only virtually, should be a continual focus.

In the UK, the FCA recently announced a temporary relief for listed companies facing the challenges of corporate reporting during the coronavirus crisis. This temporary relief will permit listed companies which need the extra time to complete their audited financial statements an additional 2 months in which publish them. Currently, under the Transparency Directive, companies have 4 months from their financial year end in which to publish audited financial statements. Under the temporary relief the FCA will, among other things, not suspend the listing of companies if they publish financial statements within 6 months of their year-end.

Similarly, in Ireland, IAASA in conjunction with The European Securities and Markets Authority (ESMA) announced that ESMA and the individual territories National Competent Authorities (NCAs), in Ireland’s case the Central Bank of Ireland, are aware of the difficulties encountered by issuers whose securities are admitted to trading on regulated markets.

To address these difficulties ESMA and the NCAs will allow an extension of:

● two months for the publication of annual reports referring to year ends occurring on or after 31 December 2019 but before 1 April 2020; and

● one month for the publication of half yearly financial reports reports referring to year ends occurring on or after 31 December 2019 but before 1 April 2020.

The reliefs provided by the FCA, ESMA and the NCAs ensures companies and their auditors take the necessary time in these uncertain times to prepare appropriate disclosures and address current practical challenges.

In the US, subject to certain conditions, the SEC has provided companies that are unable to meet filing deadlines due to COVID-19-related circumstances with an additional 45 days to submit certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020. The SEC has not yet indicated whether it will extend the filing deadline relief to filings due after April 30, 2020 (e.g, March 31, 2020 Form 10-Qs). The SEC has indicated that it is closely monitoring the situation and may, if necessary, further extend the time period during which this relief applies. The SEC has urged companies that need additional assistance to contact the SEC staff.

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be recognised for new sales if payment is probable. Changes in business conduct must also be identified on a timely basis to address any guarantees, side letters or other agreements that might address coverage of loss, right of return or other aspects that need to be appropriately accounted for and disclosed.

Debt. Companies may need to seek additional financing or amend the terms of existing debt agreements due to lost revenue, uninsured losses or losses for which insurance recoveries have not yet been received. In that case, a company may seek to amend the terms of an existing debt agreement with its lenders to temporarily or permanently increase borrowing capacity, change the interest rate or modify other contractual terms. Such modifications will need to be analysed to determine the accounting implications.

Disclosure. As the situation has developed, we have seen increased frequency and detail of disclosures related to COVID-19. Within the financial statements, companies should consider disclosure of risks and uncertainties and whether, how and when events might impact the many judgments inherent in their financial reporting, including those discussed above. Additionally, companies should evaluate whether subsequent events have occurred that require disclosure in the financial statements.

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Check in with internal and external auditors and other significant third-party service providers. Audit committees will want to ensure that internal and external auditors, and other significant third-party service providers, have a plan to continue working virtually during this time.

They will want to be aware of global considerations, such as the location of centralised service centers and the efforts needed from significant component audit teams. Other significant third-party service providers that provide support related to quarterly closes or other activities should also be investigated.

Judgments and estimates. As companies focus on their next reporting (half years or quarter for US reporters), they will need to make judgments and estimates related to financial reserves, liquidity and potential impairments. Given the fluid nature of this situation, this will be challenging. A company’s current financial performance or estimates of future earnings may be significantly affected by the loss of a significant supplier or customer whose own operations are impacted by recent events.

The guidance for goodwill and intangibles requires that an impairment test be performed when a triggering event occurs. When an impairment assessment is required, management should update the assumptions and cash flow forecasts used to reflect the potential impact of COVID-19. Audit committees need to focus on making sure that conclusions are balanced and based on appropriate assumptions.

Revenue recognition. The disruption in the supply chain and reduced consumer spending could have an impact on revenue recognition. A company may continue to sell products and services to customers impacted by disruptions caused by COVID-19. Not only should companies assess the need for write-offs or reserves on outstanding receivable balances, but revenue can only

Financial Reporting (cont’d)

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system relies. Testing the effectiveness of controls is also important. Travel bans and the ability to only work virtually may cause revisions to the control procedures or to testing plans or schedules. The board can ask: is management treating the effect of social distancing on the way people work as a trigger for an event-driven reassessment of business risk, control risk and the effectiveness of the related controls? Additional considerations will apply for US listed entities under the SarbanesOxley rules.

Human capital and executive compensation. We have already seen companies begin to layoff or “furlough" workers in industries that have a substantial hourly employee base. Compensation committees will need to think about how incentive plans may need to be changed or modified as a result. These changes could result in significant accounting implications.

Companies Registration Office (CRO) filing obligations. As companies grapple with ongoing COVID-19 related business impacts, including challenges working remotely, they may find it difficult to meet deadlines around filing their annual returns.

The CRO has given leeway in this regard, deciding that all annual returns due to be filed by any Company between March 19 and June 30 will be deemed to have been filed on time if all elements of the annual return are completed and filed by that date.

This will enable businesses and their financial advisers to focus on the more immediate financial challenges facing them at this time. The situation will be kept under review and the date June 30 may be extended depending on the situation as it develops.

As the CRO is currently closed, there will be delays in processing all other types of statutory forms.

Viability Statement. Given the current environment, many boards are facing challenges stating that they have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over a period of assessment (“the viability statement” as required for compliance with the UK Corporate Governance Code).

However, in a recent publication of guidance to companies applying the Code the Financial Reporting Council (FRC) in the UK, stressed the following points:

● Boards are required to have a “reasonable expectation” of the company’s viability over the period of assessment – during the current emergency and unprecedented pace of change, any reasonable level of expectation would naturally carry a much lower level of confidence;

● Being clear on the company’s specific circumstances and the degree of uncertainty about the future is important information; and

● When presenting a company’s viability statement, its board should draw attention to any qualifications or assumptions as necessary.

They stress the need to give fuller disclosure of the assumptions underlying the Viability statement for example describing the limits of the predictions or uncertain future events that could prove critical to viability. In addition the various future scenarios considered should be explained.

Internal control. A system of controls can be rendered ineffective by people being unavailable or unable to meet responsibilities on which the

Financial Reporting (cont’d)

For smaller boards, approving resolutions is writing in place of holding a meeting may be considered.

Annual General Meetings. While it is possible to hold virtual directors’ meetings, it is not possible to hold virtual general meetings as a physical meeting is required with the required quorum of shareholders.

Shareholders should be encouraged to vote by proxy rather than attend the physical board meeting. It is permissible to have shareholders attend but not vote by electronic means therefore directors should consider providing this option to their shareholders.

The technology to be used should be tested and clear instructions provided to shareholders on how to access the meeting electronically. Companies and boards will want to review the recently issued Chartered Governance Institute guidance regarding annual general meetings and work with their legal advisors regarding the required notification of shareholders, particularly if the company’s 2020 notice of AGM has already been issued.

Emergency board and management succession. We have already seen individuals in high-profile positions contract COVID-19. It is to be expected that these incidents will not be isolated. Boards must therefore be prepared to implement emergency temporary replacement plans should C-suite leaders become ill. Boards should also clarify their plans regarding emergency board leadership temporary replacements, with particular emphasis on the roles of board chair, committee chairs and CEO.

Tone at the top and business conduct. Boards will want to ensure that they remain focused on the tone at the top and corporate culture during times of crisis, particularly if there are changes in the operation of internal reporting structures (like risk, HR, legal) or protected disclosure processes.

Crisis management core principles. As companies work through their crisis management plans, the response should be in line with, and consistent with the company’s values. The crisis team should consist of a small, nimble, cross-functional team of leaders and workstreams with clearly defined ownership, roles and responsibilities.

Additionally, the company should be considering all relevant stakeholders, not just the obvious ones and communicating proactively and often. If the board has not done so already, it may want to consider implementing a standing board of directors call or communication plan to keep directors informed as this situation unfolds.

Conducting virtual board and committee meetings. Subject to the company’s constitution, hold the Board / Committee meetings by telephone / video conference. It is important that good quality conference facilities are used otherwise it is likely that the meetings will be harder to run and be less effective. It is vital that meetings are optimally structured and avoid complexity. Meeting guidelines should be provided to participants including clear instructions on how to join.

Good boardroom practices for virtual meetings are as, if not more important than for physical board meetings. The location of the meeting is deemed to be where the Chairperson is located, therefore, careful consideration will need to be given to the deemed location of the meeting. Ensure that a quorum and all other company law requirements are met.

Following the meeting, prepare minutes ensuring that all decisions have been clearly documented and circulate the draft minutes to the directors for review and to agree. At the next Board meeting, ensure the minutes are formally approved and signed by the Chairperson, either original or electronic signature, for insertion in the minute books.

Governance

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We’re operating in uncharted waters. Critical information on the characteristics of COVID-19 and its impacts on business are difficult to assess and can change overnight. PwC provides a variety of insights on how companies can focus their efforts.

Covid-19: Responding to potential impacts on Irish business

Managing the immediate business risks of COVID-19

COVID-19 CFO Pulse survey

PwC’s COVID-19 Navigator - an online, interactive tool to help organisations better understand where they are on their path toward COVID-19 preparedness and response.

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PwC insights on COVID-19

Carmel O’ConnorPartner, Tax Services

Tel: +353 (0) 86 819 6417Email: carmel.oconnor@pwc.com

Damian ByrnePartner, Assurance

Tel: +353 (0) 86 600 0060Email: damian.byrne@pwc.com

Pat MoranPartner, Cyber

Tel: +353 (0) 86 380 3738Email: pat.moran@pwc.com

Andy BanksPartner, Risk Assurance

Tel: +353 (0) 87 997 8831Email: andy.j.banks@pwc.com

Ruairí CosgroveDirector, Entity Governance and Compliance

Tel: +353 (0) 87 415 7770Email: ruairi.cosgrove@pwc.com

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PwC Contacts

pwc.ie/covid19At PwC, our purpose is to build trust in society and solve important problems. PwC is a network of firms in 157 countries with over 276,000 people who are committed todelivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com/ie.

This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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