Thursday, May 05, 2022

Russian invasion disclosure should consider cyber, supply chain issues, staff says

By John Filar Atwood

The Division of Corporation Finance has issued a sample comment letter to help companies determine what kinds of issues they may need to discuss in their disclosure about the impact of Russia’s invasion of Ukraine. The staff said that it expects to see detailed disclosure from companies on the issue, including direct or indirect exposure to Russia, Belarus, or Ukraine and potential cybersecurity and supply chain risks.

General disclosure. In the sample letter, the staff stated that in addition to disclosing the direct or indirect impact of the invasion, a company should discuss the any impact resulting from sanctions, limitations on obtaining relevant government approvals, currency exchange limitations, or export or capital controls. The staff advised that this should include the impact of any risks that may impede the company’s ability to sell assets located in Russia, Belarus, or Ukraine, including due to sanctions affecting potential purchasers.

Disclosure should discuss any impact from the reaction of a company’s investors, employees, customers, and other stakeholders to any action or inaction arising from the invasion, including the payment of taxes to Russia, according to the staff. A company also should consider the effect of Russia or another government nationalizing the company’s assets or operations in Russia, Belarus, or Ukraine. If a company determines that these matters are not material, it should discuss how it arrived at that conclusion.

Cybersecurity. The staff advised that a company should describe the extent and nature of the role of the board of directors in overseeing risks related to the invasion. According to the staff, this could include risks related to cybersecurity, sanctions, employees and suppliers based in affected regions, and risks connected with ongoing or halted operations or investments in affected regions. The staff said that disclosure should include, to extent material, any new or heightened risk of potential cyberattacks by state actors or others since the invasion, and whether the company has taken actions to mitigate the possible risks.

In the MD&A disclosure, the staff reminded companies to disclose any material known trends or uncertainties related to the invasion. These could include impairments of financial assets or long-lived assets; declines in the value of inventory, investments, or recoverability of deferred tax assets; the collectability of consideration related to contracts with customers; and modification of contracts with customers, the staff stated.

Accounting estimates. The staff advised companies to enhance critical accounting estimate disclosures with both qualitative and quantitative information. Companies should discuss why the critical accounting estimate is subject to uncertainty, including any new uncertainties related to the estimate, and the method used to develop the estimate and the significant assumptions underlying its calculation, the staff stated.

Companies should disclose the degree to which the critical accounting estimate and the underlying significant assumptions have changed over the current period or since the last assessment, along with the sensitivity of the reported amount to the method and assumptions underlying its calculation.

Supply chain issues. The staff said that a company should discuss any material impact of import or export bans resulting from the invasion on any products or commodities, including energy from Russia, used in its business. It also expects to ask for disclosure on whether and how business segments, products, lines of service, projects, or operations are materially impacted by supply chain disruptions.

Supply chain-related disclosure should include whether a company expect to suspend the production, purchase, sale, or maintenance of certain items, and possibly experience higher costs due to constrained capacity or increased commodity prices or challenges sourcing materials, the staff stated. According to the staff, a company also should discuss whether it expects surges or declines in consumer demand for which it is unable to adequately adjust its supply.

If a company expects to be unable to supply products at competitive prices or at all due to export restrictions, sanctions, or the invasion, that should be disclosed the staff said. A company also should discuss whether it expects to be exposed to supply chain risk in light of the invasion and/or related geopolitical tension or plans to “de-globalize” its supply chain, the staff added.

Non-GAAP measures. The staff indicated that it will comment if a company adjusts its revenues to add an estimate of lost revenue due to the invasion. In the staff’s view, recognizing revenue that was not earned during the period presented can result in the use of an individually tailored revenue recognition and measurement method which may not be in accordance with Rule 100(b) of Regulation G. In this case, the staff will ask a company to remove the adjustments.

If a company adjusts for certain expenses related to its operations in Russia, Belarus, and/or Ukraine that appear to be normal and recurring to its business, the staff expects the company to disclose the nature of the expenses. Further, a company should explain how it considered Question 100.01 of the C&DI for Non-GAAP Financial Measures, and why it believes the expenses excluded from non-GAAP measures do not represent normal, recurring operating expenses.

The staff noted that the sample comments are not an exhaustive list of potential issues that may arise, and that actual comments it issues to a company will depend on that entity’s specific facts and circumstances.