Articles from the NACD Blog

Private company governance survey reveals COVID-19 accelerated preexisting trends

The 2019–2020 NACD Private Company Governance Survey details responses from 283 private company directors—the same directors who today find themselves guiding companies that are among those hit the hardest by the COVID-19 crisis. The questionnaire was in the field from July to August of 2019. And while that might seem like a lifetime ago, the lessons drawn only take on greater significance as we project toward a new normal. What follows are some the key findings from this survey, and what they could mean for the recovery of private companies.

Redefining enterprise risk in a post-COVID-19 environment

The COVID-19 crisis has outpaced the resiliency mechanisms of most global businesses, bringing two related elements into stark relief: First, the degree of businesses’ hyper-connectivity exceeded the comprehension of most organizations. Second, many firms did not account for the risks inherent in the trade-off between efficiency and resiliency. Together, these two dynamics have revealed a degree of fragility within organizations—and indeed, the overall system—previously thought impossible. Whether or not we face a second wave of the pandemic, systemic threats—such as climate change and cyberattacks—demand new approaches to managing risk at the board level.

Navigating the pandemic: Risk oversight considerations from fortune 500 committee chairs

As companies are still confronting the immediate challenges resulting from the crisis precipitated by COVID-19, boards are beginning to turn their attention to the potential aftershocks of the pandemic to help shape their organizations’ post-crisis strategy amid great uncertainty and continued turbulence. Second- and third-degree risks, such as the credit risks of a customer’s customers or a supplier’s suppliers, are only beginning to emerge, and companies have little time to adapt to this new wave of challenges. At the same time, boards are considering the longer-term implications and opportunities that may result from the pandemic.

Think carefully before rewarding executives who cut their salaries

In past crises—the 2008 financial crisis, for example—we saw many instances of compensation committees “reimbursing” executives for their salary cuts with outsized equity grants. Some also made up for unearned annual bonus plans with equity grants in the name of retention and alignment with shareholders. Grants came at times of depressed stock prices and were usually for a larger number of shares than normal since grants were generally determined according to the then-current stock price of the underlying equity.

Cybersecurity defense and oversight during the COVID-19 crisis

Boards need to consider the ways in which their organizations’ cyber posture is changing as a result of the crisis. Board oversight is critical to ensuring that management is adapting to the evolving cyber-risk landscape as it works to maintain employee safety and continued business operations.

Articles from the HBR

How CEOs can lead selflessly through a crisis?

Crises cause us to view leaders as more charismatic and effective than we normally do. This is probably why U.S. presidents are almost universally re-elected in times of war. And research has shown that leaders who self-sacrifice tend to be the most effective.

Should a crisis change your CEO succession plan?

The exception would be if the CEO had shown any reluctance to hand over the mantle of leadership to a successor and might view the crisis as an opportunity to show how indispensable he is and stay in place. If the board does ask the CEO to stay longer than planned, limits on the extension should be negotiated; the terms might include a fixed time frame plus the existence of certain signs of stability, such as positive cash flow and sales forecasts.

Background

The COVID-19 pandemic has led to some lessors providing relief to lessees by deferring or relieving them of amounts that would otherwise be payable.  In some cases, this is through negotiation between the parties, but can be as a consequence of a government encouraging or requiring that the relief be provided. Such relief is taking place in many jurisdictions in which entities that apply IFRS Standards operate.

When there is a change in lease payments, the accounting consequences will depend on whether that change meets the definition of a lease modification, which IFRS 16, Leases defines as “a change in the scope of a lease, or the consideration for a lease, that was not part of the original terms and conditions of the lease (for example, adding or terminating the right to use one or more underlying assets, or extending or shortening the contractual lease term)”.

On April 24, 2020, the Board published an exposure draft with a proposed amendment intended to provide practical relief to lessees in accounting for rent concessions arising as a result of the COVID-19 pandemic. Given the urgency of the matter, the exposure draft was published with a 14-day comment period. On May 15, 2020, the Board considered the feedback received and decided to finalize the amendment with some changes.

Changes

The changes in Covid-19-Related Rent Concessions (Amendment to IFRS 16) amend IFRS 16 to

1. provide lessees with an exemption from assessing whether a COVID-19-related rent concession is a lease modification;
2. require lessees that apply the exemption to account for COVID-19-related rent concessions as if they were not lease modifications;
3. require lessees that apply the exemption to disclose that fact; and
4. require lessees to apply the exemption retrospectively in accordance with IAS 8, but not require them to restate prior period figures.

The main change from the proposal in the exposure draft is that the IASB had proposed that the practical expedient should only be available for lease payments originally due in 2020. However, after having considered the feedback to the exposure draft, the IASB decided to extend this period to June 2021 to also capture rent concessions granted now and lasting for 12 months.

The IASB considered but decided not to provide any additional relief for lessors as the current situation is not as equally challenging for them and the required accounting is not as complicated.

Effective date

The amendment is effective for annual reporting periods beginning on or after June 1, 2020. Earlier application is permitted, including in financial statements not yet authorized for issue at May 28, 2020. The amendment is also available for interim reports.

Proposed Taxonomy Update

The IASB has also published a proposed Taxonomy Update to reflect the amendment to IFRS 16. Comments on the proposed Taxonomy update are requested by June 29, 2020.

Additional information

• IASB press release
• Final amendment
• Proposed Taxonomy Update

The amendments to IFRS 17 are being finalized by the staff. During this process the staff identified five (sweep) issues for which the Board decided to make additional changes to the standard, along with two other matters that were identified after the staff paper had been distributed.

Listen to the podcast on the IASB's website.

Below is an analysis of all changes made to the work plan since our last analysis on April 24, 2020.

Standard-setting projects

• no changes

Maintenance projects

• Annual improvements — 2018-2020 cycle — removed from the work plan as the IASB completed this cycle of annual improvements by issuing Annual Improvements to IFRS Standards 2018–2020 on May 14, 2020; projects that were part of this cycle included:
• Fees in the ‘10 per cent’ Test for Derecognition of Financial Liabilities (Amendments to IFRS 9)
• Lease Incentives (Amendment to Illustrative Example 13 accompanying IFRS 16)
• Subsidiary as a First-time Adopter (Amendment to IFRS 1)
• Taxation in Fair Value Measurements (Amendment to IAS 41)
• Classification of liabilities — Effective date — an exposure draft ED/2020/3 Classification of Liabilities as Current or Non-current — Deferral of Effective Date (Proposed amendment to IAS 1) was published on May 4, 2020 with comments requested by June 3, 2020; the feedback on the exposure draft will be discussed in June 2020
• IFRS 16 and COVID-19 — the IASB discussed the feedback on the exposure draft published on April 24, 2020 at its supplementary meeting on May 15, 2020 and expects to issue final amendments "on or around May 28, 2020"
• IAS 37 — Onerous contracts — removed from the work plan as the IASB issued Onerous Contracts — Cost of Fulfilling a Contract (Amendments to IAS 37) on May 14, 2020
• IAS 16 — Proceeds before intended use — removed from the work plan as the IASB issued Property, Plant and Equipment — Proceeds before Intended Use (Amendments to IAS 16) on May 14, 2020
• IFRS 3 — Updating a reference to the Conceptual Framework — removed from the work plan as the IASB issued Reference to the Conceptual Framework (Amendments to IFRS 3) on May 14, 2020

Research projects

• Dynamic risk management — core model outreach has been clarified to take place in fourth quarter of 2020 (previously second half of 2020)

Other projects

• IFRS Taxonomy update — Amendments to IFRS 17 and IAS 16 — a project newly added to the work plan; a proposed taxonomy update is expected in July 2020
• IFRS Taxonomy update — Covid-19-related rent concessions (Amendment to IFRS 16) — a project newly added to the work plan; a proposed taxonomy update is expected in May 2020

The revised IASB work plan is available on the Board's website.

In its response letter, the AcSB supported the relief provided by the IASB and encouraged the IASB to provide more context and guidance on how the term “economically equivalent” will be applied in practice.

While they support the proposed amendments, they think certain principles underpinning them should be clarified both in the final amendments and in the basis for conclusions. Specifically, they encourage the IASB to provide more context and guidance on how the term “economically equivalent” will be applied in practice.

They also think the IASB should clarify how the proposed reliefs will work in multi-rate jurisdictions.

Review the letter on the IASB's website.

The consultation draft has been informed by the 300 responses the IIRC received on three topic papers published in February, ongoing observation of market practice internationally, as well as the detailed deliberations of the IIRC’s Framework Panel, a diverse group of reporting experts from the business, investor and accountancy communities. Feedback on the draft is requested through an online survey and via participation in one of over 20 virtual roundtables hosted by the IIRC’s partners globally.

Review the draft and companion document setting out the basis for the proposed Framework revisions on the IIRC's website.

In the IAASB’s ongoing response to COVID-19, guidance related to Going Concern and Subsequent Events have also been issued, and more information can be found on the IAASB’s COVID-19 Webpage.

Review the guidance for auditor reporting on the IAASB's website.

Among other changes, the amendments:

• Modify the investment test to use the aggregate worldwide market value of a registrant’s common equity.
• Revise the income test to use the lower measure of significance on the basis of (1) income from continuing operations before taxes or (2) revenue.
• Reduce required annual financial statement periods for acquirees to a maximum of the two most recent fiscal years.
• Result in fewer circumstances in which acquiree financial statements would be required for an IPO and individually insignificant acquirees.
• Permit the use of abbreviated financial statements for an acquiree in certain circumstances without a request for SEC staff permission.
• Allow the use of, or reconciliation to, IFRS® Standards as issued by the International Accounting Standards Board (IASB®) (IFRS-IASB) in certain circumstances.
• Amend the pro forma financial information disclosures to require adjustments and certain disclosures for (1) “Transaction Accounting Adjustments” and (2) “Autonomous Entity Adjustments,” which reflect the registrant as a separate entity if it was previously part of another entity. If certain conditions are met, a registrant also has the option to present “Management’s Adjustments” (e.g., synergies or dis-synergies for which there is a reasonable basis).
• Align certain requirements for a real estate acquiree with those in SEC Regulation S-X, Rule 3-05.
• Raise the significance threshold for reporting dispositions of a business from 10 percent to 20 percent to conform the threshold with that of a significant acquisition.
• Make other changes specific to smaller reporting companies and investment companies.

The final rule will become effective at the beginning of a registrant’s fiscal year that starts after December 31, 2020 (e.g. January 1, 2021, for calendar-year-end companies); however, voluntary compliance is permitted before the effective dates as long as the final rule is applied in its entirety.

Review the final rule on the SEC's website.

The resource documents relate to:

• Impairment of Long-Lived Assets
• Impairment of Goodwill and Intangible Assets with an Indefinite Life

For investment funds, the blanket relief provides a 60-day extension for certain filing, delivery and prospectus renewal obligations normally required to be made during the period from June 2, 2020 to September 30, 2020.

For non-investment fund issuers, the blanket relief provides a 45-day extension for certain filing, delivery and base shelf prospectus renewal obligations normally due or required to be made during the period from June 2, 2020 to August 31, 2020.

Investment funds and non-investment fund issuers that have already used the prior relief announced on March 23, 2020 to extend any filing, delivery and prospectus renewal deadline occurring on or before June 1, 2020 cannot use this relief to further extend the deadline.

Additionally, to rely on the relief, non-investment fund issuers must issue a news release before the required filing deadline and comply with other conditions. Issuers and their counsel are encouraged to review the respective orders to ensure compliance with these conditions.

Re­view the press re­lease on the CSA's web­site.