Sample Comment Letter on Disclosures Regarding Russia’s Invasion of Ukraine

Introduction

Russia’s invasion of Ukraine has had (and may continue to have) far-reaching impacts on SEC-reporting companies. This includes companies that: (i) Have assets, operations, or human capital resources located in Russia, Ukraine, or Belarus; (ii) Invest in those areas or hold securities that trade in those areas; (iii) Are entangled in the legal and regulatory uncertainty surrounding the invasion; or (iv) Rely on goods or services sourced in Russia, Ukraine, or Belarus, or are impacted by supply chain disruptions caused by the invasion (including potential cybersecurity risks and other indirect operational or supply chain challenges facing businesses with no physical operations in Russia, Ukraine, or Belarus). Companies must consider how to disclose direct or indirect impacts in their periodic reports to the SEC.

The SEC recently published a “Sample Letter to Companies Regarding Disclosures pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues” (“Sample Letter”¹) to help SEC-reporting companies impacted by Russia’s invasion of Ukraine update their financial statements. According to the Sample Letter, financial statements should reflect: (1) Impairment of assets; (2) Changes in inventory valuation; (3) Deferred tax assets valuation allowance; (4) Disposal or exiting of business; (5) De-consolidation; and (6) Changes in exchange rates. In addition, companies should disclose changes in contracts with customers, or in the company’s ability to collect contract considerations. Companies should determine how these matters affect management’s evaluation of disclosure controls and procedures, the effectiveness of internal controls over financial reporting, and the board of directors’ role in risk oversight of any action related to Russia’s invasion of Ukraine, including considering whether to continue operations or investment in Russia and/or Belarus.

SEC SAMPLE COMMENTS

The Sample Letter provides specific examples of comments that may apply to a wide range of issuers. These sample comments address general disclosure, cybersecurity, MD&A, non-GAAP measures, disclosure controls and procedures, and internal control over financial reporting.

General

Issuers with a material portion of their operation or assets located in Russia, Belarus, or Ukraine should describe the direct or indirect impact of Russia’s invasion of Ukraine on their business (or, if the impact is not material, the issuer should explain why). The discloser should include:

• The impact of sanctions, limitation on regulatory approvals, or export or capital controls; and
• The implications if Russia or another government nationalizes issuers’ assets in, connections to, or operations in Russia, Belarus, or Ukraine.

The issue should also describe the extent and nature of the board of directors’ role in overseeing risks related to Russia’s invasion of Ukraine, including with respect to cybersecurity, sanctions, employees, supply chain issues, and risk associated with ongoing operations or investment decisions.

Risks related to cybersecurity

Issuers should disclose new or heightened risk of potential cyberattacks by state actors and discuss any actions taken to mitigate the risk.

Management’s discussion and analysis (MD&A)

Issuers should update their MD&A to disclose the impact of all of the following:

• Any known trends or uncertainties that have had or are reasonably likely to have a material impact on cash flow, liquidity, capital resources, cash requirements, financial positions, or results of operations.
• Enhanced critical accounting estimate disclosures related to (among others) the impairment of assets, valuation of inventory, allowance for bad debt, deferred tax assets valuation allowance, or revenue recognition. Include both qualitative and quantitative information, plus:
  • Descriptions of why existing critical accounting estimates are subject to uncertainty;
  • Estimates and assumptions underlying certain calculations;
  • The degree to which estimates and assumptions have changed since the last assessment; and
  • The sensitivity of the reported amount to the method and assumptions underlying its calculation.
• Any material impact import or export bans have on any products or commodities sold by or consumed in the issuer’s business. The disclosure should include the estimated impact on the issuer’s business, taking into consideration the availability of materials, cost of needed materials, cost and risks associated with transportation, and the impact on margins and customers.
• The impact of supply chain disruption or operations challenges on business segments, products, line of service, projects, or operations. The disclosure may include:
  • Suspensions in the production, purchase, sale, or maintenance of certain items;
  • Higher costs due to constrained capacity, increased commodity prices, or sourcing challenges;
  • Surges or declines in consumer demands that cannot be addressed with adequate adjustments to supply;
  • The inability to source supply products at competitive prices; or
  • Exposure to supply chain risks or expectations of “de-globalizing” the supply chain.

  Non-GAAP measures

  Any non-GAAP adjustments relating to lost revenue, revenue recognition, or expenses must be in compliance with Regulation G2.² Refer to Questions 100.04 and 100.01 of the Division’s C&DI for non-GAAP financial measures.³

  Disclosure controls and procedures

  To the extent applicable, the issuer should describe the impact of Russia’s invasion of Ukraine on the effectiveness or design of disclosure controls and procedures, including the impact on Issuers’ conclusion of the effectiveness of disclosure controls and procedures as of the end of the reporting period.

  Internal control over financial reporting

  To the extent applicable, the issuer should disclose any changes to internal controls over financial reporting as a result of Russia’s invasion of Ukraine (or any indirect impacts, such as supply chain disruptions) that materially affected or are reasonably likely to materially affect the issuers’ internal controls over financial reporting.

  The SEC’s guidance in the Sample Letter provides an example of the types of disclosure that SEC reporting companies should consider before filing their next periodic forms.

  References and Footnote

  1. U.S. Securities and Exchange Commission, “Sample Letter to Companies regarding Disclosure Pertaining to Russia’s Invasion of Ukraine and Related Supply Chain Issues” (May 3, 2022). https://www.sec.gov/corpfin/sample-letter-companies-pertaining-to-ukraine.
  2. 17 C.F.R. §§ 244.100 et seq. Regulation G provides a set of rules and regulations in connection with the use of non-GAAP financial measures. See also U.S. Securities and Exchange Commission, “Non-GAAP Financial Measures” (last updated April 4, 2018), https://www.sec.gov/corpfin/non-gaap-financial-measures (“Non-GAAP Financial Measures”).
  3. See Non-GAAP Financial Measures, supra note 8. Question 100.04 provides that non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b) of Regulation G. Question 100.01 provides that certain adjustments, although not explicitly prohibited, may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading.