SEC: Companies must adequately disclose financial impact of Russia’s war on Ukraine

The SEC’s Division of Corporation Finance published a sample letter Tuesday laying out the disclosure obligations public companies have regarding their 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. There might also be increased cybersecurity risks, supply chain challenges, and commodity prices that are material and should be disclosed, the SEC said.

“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, deconsolidation, changes in exchange rates, and changes in contracts with customers or the ability to collect contract considerations,” the agency said.

Many American and European companies have ceased or begun winding down operations in Russia, Belarus, and Ukraine to mitigate sanctions risk, cut off association with Russia, or because of safety concerns to employees in those countries. Both the United States and European Union have levied unprecedented sanctions against Russia and Belarus, in an attempt to cut the Russian economy off from the rest of the world and dampen its ability to fund its war against Ukraine.

But as companies assess the ramifications on their finances caused by their decision to exit the Russian economy and comply with sanctions, they might also find other ways the war is affecting their bottom line.

Based on the Division of Corporation Finance’s selective review of filings since Russia invaded Ukraine, the SEC has noticed several common deficiencies in public companies’ disclosures regarding the war. Those deficiencies include not adequately disclosing:

• 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 ensure they are not violating Rule 100(b) of Regulation G by improperly attributing revenue losses to the war that were caused by other factors or attributing “normal and recurring” expenses to the war, the SEC noted.