Sample Letter to Companies Regarding Disclosures Pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues[1]
Companies may have disclosure obligations under the federal securities laws 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 Division of Corporation Finance (the “Division”) believes that
companies should provide detailed disclosure, to the extent material or otherwise
required, regarding (1) 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, (2) direct or indirect reliance on goods or services sourced in
Russia or Ukraine or, in some cases, in countries supportive of Russia, (3) actual
or potential disruptions in the company’s supply chain, or (4) business
relationships, connections to, or assets in, Russia, Belarus, or Ukraine. The
financial statements may also need to reflect and disclose the impairment of assets,
changes in inventory valuation, deferred tax asset valuation allowance, disposal or
exiting of a business, de-consolidation, changes in exchange rates, and changes in
contracts with customers or the ability to collect contract considerations. In
addition, since Russia’s invasion of Ukraine, many companies have experienced
heightened cybersecurity risks, increased or ongoing supply chain challenges, and
volatility related to the trading prices of commodities regardless of whether they
have operations in Russia, Belarus, or Ukraine that warrant disclosure.
Companies also should consider how these matters affect management’s evaluation of
disclosure controls and procedures, management’s assessment of the effectiveness of
internal control over financial reporting, and 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 Division selectively reviews filings made under the Securities Act of 1933 and
the Securities Exchange Act of 1934 to monitor and enhance compliance with
applicable disclosure requirements. The following illustrative letter contains
sample comments that the Division may issue to companies based on their specific
facts and circumstances. The sample comments do not constitute an exhaustive list of
the issues that companies should consider. As always, companies should evaluate
whether they have experienced or been impacted by matters characterized as potential
risks and, if so, update disclosures accordingly. Any comments issued would take
into consideration the disclosure that a company has provided in Commission filings
or otherwise made publicly available. The Division encourages companies to contact
the industry office responsible for the company’s filings with any questions
regarding the company’s proposed disclosure on these topics.
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May 2022
Name
ABC Corporation
Address
Dear Issuer:
We have reviewed your filing and have the following comments.
Please revise or update your disclosure in response to our
comments.
General
1. [You refer to your business in
[Russia/Belarus/Ukraine]] OR [We note that a
material portion of your operations or those of
companies with which you do business is conducted
through facilities located in
[Russia/Belarus/Ukraine]]. Please describe the
direct or indirect impact of Russia’s invasion of
Ukraine on your business. In addition, please also
consider any impact:
If the impact is not material, please explain
why.
2. Please describe the extent and nature of the
role of the board of directors in overseeing risks
related to Russia’s invasion of Ukraine. This could
include, but is not limited to, risks related to
cybersecurity, sanctions, employees based in
affected regions, and supply chain/suppliers/service
providers in affected regions as well as risks
connected with ongoing or halted operations or
investments in affected regions.
Risks Related to Cybersecurity
3. To the extent material, disclose any new or
heightened risk of potential cyberattacks by state
actors or others since Russia’s invasion of Ukraine
and whether you have taken actions to mitigate such
potential risks.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations
4. Please disclose any known trends or
uncertainties that have had or are reasonably likely
to have a material impact on your 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. Trends or
uncertainties may 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.
5. Please enhance your 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, to the extent the
information is material and reasonably available,
that addresses the following:
6. 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 your business, or sold by you.
Disclose the current and anticipated impact on your
business, taking into account the availability of
materials, cost of needed materials, costs and risks
associated with transportation in your business, and
the impact on margins and on your customers.
7. Please disclose whether and how your 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. For example, discuss whether
you have or expect to:
Explain whether and how you have undertaken efforts
to mitigate the impact and where possible quantify
the impact to your business.
Non-GAAP Measures
8. We note your adjustment to add an estimate of
lost revenue due to [Russia’s invasion of Ukraine
and/or supply chain disruptions]. Recognizing
revenue that was not earned during the period
presented results 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. Please remove these adjustments. Refer
to Question 100.04 of the Division’s C&DI for
Non-GAAP Financial Measures.
9. We note your adjustment for certain expenses
[such as compensation expense or bad debt expense]
incurred related to your operations in Russia,
Belarus, and/or Ukraine that appear to be normal and
recurring to your business. Please tell us the
nature of these expenses. Explain how you have
considered Question 100.01 of the Division’s
C&DI for Non-GAAP Financial Measures and why you
believe that the expenses excluded from your
non-GAAP measures do not represent normal, recurring
operating expenses.
Disclosure Controls and Procedures
10. Based on your disclosures, it appears that you
may have had changes in or issues that arose
impacting the effectiveness of your disclosure
controls and procedures due to Russia’s invasion of
Ukraine [and/or supply chain disruptions]. Please
tell us the impact of Russia’s invasion of Ukraine
on your design of disclosure controls and procedures
and its impact on your conclusion of their
effectiveness as of the end of the reporting
period.
Internal Control Over Financial Reporting
11. Based on your disclosures, it appears that you
may have had changes to your internal controls as a
result of Russia’s invasion of Ukraine [and/or
supply chain disruptions]. Please disclose any
changes in your internal control over financial
reporting identified in connection with your
evaluation that occurred during the last fiscal
quarter (or your fourth fiscal quarter in the case
of an annual report) that has materially affected or
is reasonably likely to materially affect your
internal controls over financial reporting. See Item
308(c) of Regulation S-K.
We remind you that the company and its management are
responsible for the accuracy and adequacy of their
disclosures, notwithstanding any review, comments, action or
absence of action by the staff.
Sincerely,
Division of Corporation Finance
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Footnotes
[1]
The statements in this guidance represent the views of the staff of the Division
of Corporation Finance. This guidance is not a rule, regulation, or statement of
the Securities and Exchange Commission (the “Commission”). The Commission has
neither approved nor disapproved its content. This guidance, like all staff
guidance, has no legal force or effect: it does not alter or amend applicable
law, and it creates no new or additional obligations for any person.