On May 2, 2022 the SEC’s Division of Corporation Finance issued a sample comment letter addressing disclosures companies should consider regarding Russia’s invasion of Ukraine. The SEC Staff believes companies should provide detailed disclosures of their direct or indirect exposure to Russia, Belarus, and/or Ukraine including through operations, investments, and potential cybersecurity and supply chain risks. A link to the sample letter is here.
The sample comment letter lists several topics subject to disclosure consideration the SEC Staff will focus on:
- Companies should discuss any impact from sanctions, currency exchange limitations, export or capital controls or limitations on obtaining relevant government approvals. The Staff said this discussion should include the impact of any risks impairing companies’ ability to sell assets located in Russia, Belarus and/or Ukraine, including due to sanctions affecting potential purchasers.
- Companies should discuss any impact from the reaction of companies’ investors, employees, customers or others to action or inaction arising from the invasion. Companies should consider the effect the nationalization of assets or operations in Russia, Belarus and/or Ukraine; if these matters are deemed not material, discussion of how that conclusion was reached should be disclosed.
- The Staff may request discussion of the role of the board of directors on overseeing risks related to the invasion, including those related to cybersecurity, sanctions, and employees and suppliers based in affected regions. With respect to cybersecurity, disclosure should describe any material new or increased risks of cyberattacks since the invasion as well as actions taken to mitigate those risks.
- In the Management’s Discussion and Analysis section of Forms 10-K and 10-Q or prospectuses, the Staff reminds companies of the requirement to disclose material trends or uncertainties including with respect to the invasion. The trends or uncertainties mentioned by the Staff include impairments of assets, decline in inventory value or investments, and collectability of consideration or modification of contracts with customers.
- Companies should enhance their actual accounting estimate disclosures with both qualitative and quantitative information, if such information is material and reasonably available, that addresses why the estimate is subject to uncertainty, including new uncertainties related to the estimate, the method used to develop the estimate and the significant assumptions underlying its calculations, the degree to which the estimate and underlying assumptions have changed over the current period, and the sensitivity of the reported audit to the method and assumption underlying its calculation.
- Companies 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. The Staff 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 expects to suspend the production, purchase, sale, or maintenance of certain items.
- If companies adjust revenues to add an estimate of lost revenue relating to the invasion, the Staff will ask that such adjustments be removed. If companies adjust for certain expenses related to operations in Russia, Belarus and/or Ukraine that appear to be normal and recurring, the Staff expects disclosure of the nature of the expenses and an explanation of how Staff interpretations of rules relating to non-GAAP measures were considered.
- Companies should be mindful of the impact of the invasion in the design or effectiveness of the relevant controls, if any.
The Staff noted that the sample comments do not list all of the potential issues that may arise. Only a handful of actual comment letters have been made public so far.
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