August 5, 2022

Corp Fin Continues to Press for Disclosure on the War in Ukraine

In the May-June 2022 issue of The Corporate Counsel, we covered the disclosure implications of the war in Ukraine and the SEC’s guidance on the topic in the form of a Sample Comment Letter (you can also listen to a Deep Dive with Dave podcast on this topic). We continue to see comments from the Staff that are very much focused on this topic, and the WSJ recently reported on Corp Fin’s efforts in this area using data from Audit Analytics. The article notes that the Staff has pressed several issuers about the financial impact of the ongoing war and their level of continuing investment in Russia, Belarus and Ukraine. As discussed in the Sample Comment Letter, the Staff has particularly noted that companies should provide detailed disclosure, “to the extent material or otherwise required,” regarding:

The war in Ukraine is also intertwined with global economic conditions, and we have noted that the Staff is particularly focused on disclosure about the impact of these economic conditions on public companies. In particular, in recent comment letters the Staff has been seeking additional disclosure about supply chain disruptions brought about by the war in Ukraine and the lingering effects of the global pandemic, as well as risk factor and MD&A disclosure regarding the impact of inflation and higher interest rates. We predicted the Staff’s focus on disclosure about inflation in the November-December 2021 issue of The Corporate Counsel:

One topic that had largely gone the way of the dinosaur in risk factor disclosure and in MD&A has been the impact of inflation, obviously because we have lived in a particularly prolonged period of very low inflation and interest rates. As the negative impact of inflation has waned from our collective consciousness, the need for specific disclosure about inflation has likewise diminished over time. This is perhaps demonstrated by the fact that Item 303 of Regulation S-K included a specific requirement to address inflation up until a year ago, when the SEC felt comfortable turning to a more principles-based approach because having a specific requirement referencing inflation and changing prices “may give undue attention to the topic.”

As revised, Item 303 still requires companies to discuss the impact of inflation or changing prices if they are part of a known trend or uncertainty that had, or is reasonably likely to have, a material impact on net sales, revenue, or income from continuing operations. Further, Item 303 requires that, where the financial statements reveal material changes from period-to-period in one or more line items, companies must describe the underlying reasons for these material changes in quantitative and qualitative terms, which could result in a discussion of inflation and changing prices.

Rising prices in many sectors, whether ultimately transitory or more permanent, could have a significant impact on the results of operations and financial condition of public companies, and as a result we expect to see more discussion of this topic in both risk factors and MD&A. Some companies may choose to include a separate risk factor regarding risks from inflation, or rather incorporate the discussion into the broader topic of general economic risks. We also expect the inflationary trend to prompt more discussion of the risks associated with rising interest rates, including the risk of increased costs of variable rate debt and refinancing risks for fixed rate debt.

We expect that the Staff may be focused on risk factor and MD&A disclosure about inflation in its upcoming filing reviews, to see if companies heeded the guidance from the adopting release for the 2020 MD&A amendments that such matters must still be addressed even absent the specific line item requirement when such matters represent a known trend or uncertainty that had, or is reasonably likely to have, a material impact on net sales, revenue, or income from continuing operations.

Finally, the Staff’s comments continue to focus on non-GAAP financial measures, including in particular non-GAAP financial measures that seek to adjust for the impact of the war in Ukraine, supply chain issues and inflation or other economic fallout. I often analogize the Staff’s level of interest in non-GAAP financial measures to a swinging pendulum, and it certainly seems from recent comment letters that the pendulum has swung into heightened scrutiny mode in recent months. You can find a comprehensive overview of recent non-GAAP financial measure comments in the September-October 2021 issue of The Corporate Counsel.

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– Dave Lynn