By George Wilson
First Quarter COVID-19 Disclosure Examples – Part Two
In our last post we started a series to explore examples of disclosures companies have made to address issues raised by COVID-19 in their first quarter 2020 Form 10-Q’s.
This second example is from Alphabet’s Form 10-Q for the quarter ended March 31, 2020. Unlike Starbucks, who put all their COVID-19 related financial statement disclosures in one footnote, Alphabet included disclosure as appropriate in relevant footnotes.
First, here is an addition Alphabet made in their 1995 Private Securities Litigation Reform Act safe harbor meaningful cautionary statements:
Note About Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, among other things, statements regarding:
- the effect of the novel coronavirus pandemic ("COVID-19") on our business, operations, and financial results, including the effect of governmental lockdowns, restrictions and new regulations on our operations and processes;
In the notes to the quarterly financial statements this language was added to the Use of Estimates section:
Use of Estimates
As of March 31, 2020, the impact of the outbreak of COVID-19 continues to unfold. As a result, many of our estimates and assumptions required increased judgment and carry a higher degree of variability and volatility. As events continue to evolve and additional information becomes available, our estimates may change materially in future periods.
In their discussion of the allowance for uncollectible accounts receivable Alphabet added the bolded language below to their disclosure:
Our payment terms for accounts receivable vary by the type and location of our customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customers, we require payment before the products or services are delivered to the customer.
We maintain an allowance for credit losses for expected uncollectible accounts receivable, which is recorded as an offset to accounts receivable and changes in such are classified as general and administrative expense in the Consolidated Statements of Income. We assess collectibility by reviewing accounts receivable on a collective basis where similar characteristics exist and on an individual basis when we identify specific customers with known disputes or collectibility issues. In determining the amount of the allowance for credit losses, we consider historical collectibility based on past due status and make judgments about the creditworthiness of customers based on ongoing credit evaluations. We also consider customer-specific information, current market conditions and reasonable and supportable forecasts of future economic conditions to inform adjustments to historical loss data.
For the three months ended March 31, 2020, our assessment considered business and market disruptions caused by COVID-19 and estimates of expected emerging credit and collectibility trends. The continued volatility in market conditions and evolving shifts in credit trends are difficult to predict causing variability and volatility that may have a material impact on our allowance for credit losses in future periods. The allowance for credit losses on accounts receivable was $275 million and $717 million as of December 31, 2019 and March 31, 2020, respectively.
In their disclosure about equity investment Alphabet added COVID-19 considerations in the bolded language below:
The following discusses our marketable equity securities, non-marketable equity securities, gains and losses on marketable and non-marketable equity securities, as well as our equity securities accounted for under the equity method.
Our marketable equity securities are publicly traded stocks or funds measured at fair value and classified within Level 1 and 2 in the fair value hierarchy because we use quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets. All gains and losses on marketable equity securities, realized and unrealized, are recognized in other income (expense), net.
Our non-marketable equity securities are investments in privately held companies without readily determinable market values. The carrying value of our non-marketable equity securities is adjusted to fair value for observable transactions for identical or similar investments of the same issuer or impairment (referred to as the measurement alternative). We qualitatively assess whether indicators of impairment exist. Factors considered in our assessment include the companies’ financial and liquidity position, access to capital resources, exposure to industries and markets impacted by COVID-19, and the time since the last adjustment to fair value, among others. If the assessment indicates that the investment is impaired, we estimate the fair value by using the best information available, which may include cash flow projections or other available market data. The effect of COVID-19 on our impairment assessment requires significant judgment due to the uncertainty around the impact.
Alphabet addressed COVID-19’s impact on taxes:
Note 14. Income Taxes
Our effective tax rate for the three months ended March 31, 2020 was lower than the U.S. federal statutory rate, primarily due to the U.S. Research and Development Tax Credit, the Foreign-Derived Intangible Income tax benefit, and stock-based compensation related tax benefits. Our effective tax rate is based on forecasted annual results which may fluctuate significantly through the rest of the year, in particular due to the uncertainty in our annual forecasts resulting from the unpredictable impact of COVID-19 on our operating results.
Lastly, Alphabet added the following to the introduction to their MD&A:
The Impact of COVID-19 on our Results and Operations
In late 2019, an outbreak of COVID-19 emerged and by March 11, 2020 was declared a global pandemic by The World Health Organization. Across the United States and the world, governments and municipalities instituted measures in an effort to control the spread of COVID-19, including quarantines, shelter-in-place orders, school closings, travel restrictions and the closure of non-essential businesses. By the end of March, the macroeconomic impacts became significant, exhibited by, among other things, a rise in unemployment and market volatility.
For most of the quarter ended March 31, 2020, our results reflect historical trends and seasonality. However, in March 2020 we experienced a decline in advertising revenues due to the impact of COVID-19 and the related reductions in global economic activity. While users’ search activity increased, their interests shifted to less commercial topics. In addition, our advertising revenues were negatively affected by reduced spending by our advertisers in response to the macroeconomic impact.
We also assessed the realized and potential credit deterioration of our customers due to changes in the macroeconomic environment, which has been reflected in an increase in our allowance for credit losses for accounts receivable. In addition, we experienced declines in the valuation of our equity investments.
Looking ahead, the full impact of COVID-19 on our business is unknown and highly unpredictable. Our past results may not be indicative of our future performance and historical trends in revenues, operating income, operating margin, net income, EPS, among others, may differ materially. For example, to the extent the pandemic continues to disrupt economic activity globally we, like other businesses, would not be immune as it could adversely affect our business, operations and financial results through prolonged decreases in advertising spend, credit deterioration of our customers, depressed economic activity, or declines in capital markets. In addition, many of our expenses are less variable in nature and may not correlate to changes in revenues. The extent of the impact will depend on a number of factors, including the duration and severity of the pandemic; advances in testing, treatment and prevention; and the macroeconomic impact of government measures to contain the spread of the virus and related government stimulus measures.
To address the potential impact to our business, over the near-term, we are reevaluating the pace of our investment plans, including, but not limited to, our hiring, investments in data centers, servers, network equipment, real estate and facilities, and marketing and travel spending, as well as taking certain measures to support our customers.
Within MD&A Alphabet also addressed the impact of COVID-19 on various operating units:
Google advertising revenues
In addition to the impact of COVID-19, our advertising revenue growth, as well as the change in paid clicks and cost-per-click on Google properties and the change in impressions and cost-per-impression on Google Network Members' properties and the correlation between these items, have been affected and may continue to be affected by various factors, including:
- advertiser competition for keywords;
- changes in advertising quality, formats, delivery or policy;
- changes in device mix;
- changes in foreign currency exchange rates;
- fees advertisers are willing to pay based on how they manage their advertising costs;
- general economic conditions;
- seasonality; and
- traffic growth in emerging markets compared to more mature markets and across various advertising verticals and channels.
As always, your thoughts and comments are welcome!