SEC sample letter provides disclosure guidance relating to Russian invasion of Ukraine
Likely topics of SEC staff comment include disclosure controls, internal control over financial reporting, MD&A, non-GAAP measures and cybersecurity risk
The staff of the U.S. Securities and Exchange Commission (the “SEC”) has issued a “sample letter” reminding companies of their disclosure obligations pertaining to Russia’s invasion of Ukraine and related supply chain issues. Among other things, the sample letter warns companies that the SEC staff may ask about the impact of the invasion on their disclosure controls and procedures and their internal control over financial reporting.
The SEC staff periodically issues sample letters to alert companies of the likely questions the staff will ask when reviewing the disclosures in a registration statement, annual report or other SEC filing. While the sample letter is not intended to create any new or additional disclosure obligations, it clearly signals the areas of probable SEC staff comment. Registrants will need to resolve any comments, whether by including additional disclosure in their SEC filing or providing supplemental explanations or information to the SEC staff.
In the new sample letter, the SEC staff states that companies may have disclosure obligations related to the direct or indirect impact that Russia’s invasion of Ukraine and the international response have had or may have on their business. To satisfy these obligations, the SEC staff believes that companies should provide detailed disclosure, to the extent material or otherwise required, regarding:
- direct or indirect exposure to Russia, Belarus, or Ukraine through their operations, employee base, investments in Russia, Belarus, or Ukraine, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty associated with operating in or exiting Russia or Belarus;
- direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia;
- actual or potential disruptions in the company’s supply chain; and
- business relationships, connections to, or assets in, Russia, Belarus, or Ukraine.
The sample letter also notes that financial statements may need to reflect and disclose any impairment of assets, changes in inventory valuation, deferred tax asset valuation allowance, disposal or exit of a business, de-consolidation, changes in exchange rates, and changes in contracts with customers or the ability to collect contract consideration.
Further, regardless of whether they have operations in Russia, Belarus, or Ukraine that warrant disclosure, companies should also disclose any heightened cybersecurity risks, increased or ongoing supply chain challenges, and volatility related to the trading prices of commodities due to the invasion.
The SEC staff will also expect companies to consider how these matters affect management’s evaluation of disclosure controls and procedures, and its assessment of the effectiveness of internal control over financial reporting. Registrants should also analyze the role of the board of directors in risk oversight of any action or inaction related to Russia’s invasion of Ukraine, including consideration of whether to continue or to halt operations or investments in Russia and/or Belarus.
The specific comments in the sample letter cover six topics:
- General – If a company has business in Russia/Belarus/Ukraine or a material portion of its operations or companies with which it does business is conducted through facilities located in Russia/Belarus/Ukraine, the company will be asked to disclose the direct or indirect impact of Russia’s invasion of Ukraine on its business. If the impact is not material, the SEC staff will ask for an explanation. The SEC staff will also likely ask for a description of the extent and nature of the role of the board of directors in overseeing risks related to Russia’s invasion of Ukraine.
- Risks related to cybersecurity – To the extent material, a company should disclose any new or heightened risk of potential cyberattacks by state actors or others since Russia’s invasion of Ukraine, and whether it has taken actions to mitigate such potential risks.
- Management’s discussion and analysis (“MD&A”) – In the MD&A section, the SEC staff will expect companies to:
- disclose any known trends or uncertainties that have had or are reasonably likely to have a material impact on cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations arising from, related to, or caused by the global disruption from, Russia’s invasion of Ukraine;
- enhance their critical accounting estimate disclosures related to impairment of assets, valuation of inventory, allowance for bad debt, deferred tax asset valuation allowance, or revenue recognition, as applicable, with both qualitative and quantitative information;
- disclose any material impact of import or export bans resulting from Russia’s invasion of Ukraine on any products or commodities, including energy from Russia, used in their business, or sold by the company; and
- disclose whether and how their business segments, products, lines of service, projects, or operations are materially impacted by supply chain disruptions, especially in light of Russia’s invasion of Ukraine.
- Non-GAAP measures – The sample letter warns companies that the SEC staff will question adjustments to add an estimate of lost revenue due to Russia’s invasion of Ukraine and/or supply chain disruptions, or for certain expenses (such as compensation expense or bad debt expense) incurred related to operations in Russia, Belarus, and/or Ukraine that appear to be normal and recurring.
- Disclosure controls and procedures – The SEC staff may ask for an explanation of the impact of Russia’s invasion of Ukraine on a company’s design of disclosure controls and procedures and the impact on its conclusion as to their effectiveness.
- Internal control over financial reporting – The SEC staff may ask for disclosure of any changes in a company’s internal control over financial reporting identified in connection with its evaluation that occurred during the last fiscal quarter that has materially affected or is reasonably likely to materially affect its internal control over financial reporting.
We will continue to monitor developments in this area and welcome any queries you may have.
