The Securities and Exchange Commission (SEC) is warning public companies that the impact of Russia's war on Ukraine on their business must be accurately and adequately disclosed.
The Securities and Exchange Commission's Division of Corporation Finance released a sample letter on Tuesday outlining public companies' disclosure obligations regarding direct or indirect exposure to Russia, Belarus, or Ukraine, as well as supply chain and business relationships that are or could be disrupted by the war. According to the SEC, there may be increased cybersecurity risks, supply chain challenges, and material commodity prices that should be disclosed.
"The financial statements may also need to reflect and disclose asset impairment, changes in inventory valuation, deferred tax asset valuation allowance, business disposal or exit, deconsolidation, exchange rate changes, and changes in contracts with customers or the ability to collect contract considerations," according to the agency.
Many American and European companies have ceased or are in the process of ceasing operations in Russia, Belarus, and Ukraine in order to avoid sanctions, cut ties with Russia, or to ensure the safety of their employees in those countries. Both the US and the EU have imposed unprecedented sanctions on Russia and Belarus in an effort to isolate Russia's economy from the rest of the world and limit its ability to fund its war in Ukraine.
Companies may discover other ways the war is affecting their bottom line as they assess the financial consequences of their decision to exit the Russian economy and comply with sanctions.
The SEC has identified several common deficiencies in public companies' war disclosures based on the Division of Corporation Finance's selective review of filings since Russia invaded Ukraine. Among these flaws is a failure to adequately disclose:
- The direct or indirect impact of business conducted by facilities in Russia, Belarus, or Ukraine, as well as the impact of sanctions, limitations on obtaining government approval or the ability to sell assets in those countries, currency exchange limitations, or export or capitol controls;
- The reaction of investors, employees, customers, and other stakeholders to any action or inaction related to Russia, including the payment of Russian taxes;
- The risk posed by Russia or another country nationalizing the firm’s assets;
- Heightened cybersecurity risks from potential cyberattacks by state actors or others, and the steps the firm has taken to mitigate such risks;
- Trends and uncertainties that have had or are likely to have material impact on the firm’s financial position, including “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.”;
- Critical accounting estimate disclosures related to the “impairment of assets, valuation of inventory, allowance for bad debt, deferred tax asset valuation allowance, or revenue recognition,” as well as the reasons why there might be uncertainty related to the estimate, methods used, and the degree that underlying assumptions have changed; and
- Supply chain disruptions affecting the firm’s ability to produce, purchase, sell, or maintain certain items, as well as higher costs, surges, or declines in consumer demand; inability to supply products at competitive prices; or supply chain risk caused by the firm’s announced plans to “deglobalize” its supply chain.
Firms should also check to see if they are not breaking Regulation G's Rule 100(b) by improperly attributing revenue losses to the war that were caused by other factors or attributing "normal and recurring" expenses to the war, according to the SEC.
By fLEXI tEAM