Corp Fin has posted a sample comment letter to companies about potential disclosure obligations arising out of the Russian invasion of Ukraine, the international response to it and related supply chain issues. Corp Fin wants companies to provide more "detailed disclosure, to the extent material or otherwise required," about the direct or indirect impact on their businesses of their exposure to or business relationships with Russia, Belarus or Ukraine, any goods or services sourced in those countries and supply chain disruption. The letter provides a useful resource to help companies think through how their businesses have been or may be affected, even if they don't have operations in Russia or Ukraine.

More specifically, Corp Fin advises companies to provide detailed disclosure regarding

  • "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,
  • direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia,
  • actual or potential disruptions in the company's supply chain, or
  • business relationships, connections to, or assets in, Russia, Belarus, or Ukraine."

Corp Fin advises that companies should also consider the impact on their financial statements. For example, companies may "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."


This recent PCAOB Spotlight paper provides some guidance regarding auditing considerations related to the Russian invasion of Ukraine. The paper observes that the Russian invasion affects not only "companies with operations in the region but also has the potential for far-reaching economic impacts on companies operating across different jurisdictions."  In addition to economic sanctions imposed by many governments, the paper indicates, "companies located (or with significant business ties) in Ukraine are experiencing major disruptions of their operations, including the loss of some or all of their physical assets and workforce. Some companies may have idled or abandoned their production facilities and inventories in anticipation of escalating hostilities in the region."

The paper discusses the identification and assessment of risks, such as potential risks related to fraud and cybersecurity; planning and performing audit procedures, such as the possibility that audit evidence may not be available in the form originally expected; the potential need to reevaluate materiality and tolerable misstatement; and lack of access to necessary information, which could impair conduct of the audit or lead to implementation of new or modified processes and controls that constitute part of internal control over financial reporting.

Areas identified in the paper that might be especially affected by changing conditions include going concern analyses, asset impairment and valuation, accounting estimates, revenue, debt and consolidation. The impact of the invasion could also affect an auditor's determination of whether a matter is a CAM.

In addition, the paper observes that some global accounting firms have begun to cut ties with Russian (and Belarusian) member firms of their networks, which may call for modified approaches.

The paper also advises that the "rapidly changing environment may necessitate more frequent communications between auditors and audit committees."  Strict economic sanctions could also give rise to potential non-compliance with sanctions and other laws or regulations that may be illegal acts and could have an effect on the financial statements, information that would need to be relayed to the audit committee.  

Importantly, "auditors of companies with significant operations in the affected areas may face restrictions on the scope of the audit (e.g., limited access to information or inability to obtain sufficient appropriate audit evidence). In the event the auditor concludes that a qualification or a disclaimer of opinion is appropriate in the circumstances for an audit of the financial statements or internal control over financial reporting," that conclusion could have implications with respect to acceptance of the opinion by the SEC.

Even if companies do not have significant operations in or dealings with Russia, Belarus or Ukraine, they could still experience a substantial impact.  For example, since the invasion, Corp Fin observes, "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."


Bloomberg reports that Corp Fin Chief Accountant Lindsay McCord, speaking at a recent conference, said that, where companies rely on products sourced in Russia or Ukraine, they may be "indirectly exposed to the conflict through higher prices for inventory or slower production timelines. Companies that can't produce enough goods may not be able to meet revenue projections.and should consider discussing changes from historical performance or changes to contracts with customers." According to this article in the FT, in addition to oil and gas and grain, Russia is also a source of "chemical gases C4F6 and neon that are vital to semiconductor production," and "an important source of metals used in manufacturing such as nickel, titanium, palladium and aluminium. Titanium is needed by aircraft and aero-engine manufacturers. while palladium is used in catalytic converters, electrodes and electronics."

Corp Fin also advises companies to consider the impact on their controls, including management's evaluation of disclosure controls and procedures and management's assessment of the effectiveness of internal control over financial reporting.  In addition, companies should consider "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 sample comment letter provides illustrative comments related to the impact of the invasion generally, cybersecurity risks, MD&A, non-GAAP measures, disclosure controls and internal control over financial reporting.  For example, where the company or companies with which it does business have material operations or conduct business through facilities located in Russia, Belarus or Ukraine, Corp Fin asks for a description of the direct or indirect impact of Russia's invasion of Ukraine on the company's business, taking into account the impact:

  • "resulting from sanctions, limitations on obtaining relevant government approvals, currency exchange limitations, or export or capital controls, including the impact of any risks that may impede your ability to sell assets located in Russia, Belarus, or Ukraine, including due to sanctions affecting potential purchasers;
  • resulting from the reaction of your investors, employees, customers, and/or other stakeholders to any action or inaction arising from or relating to the invasion, including the payment of taxes to the Russian Federation; and
  • that may result if Russia or another government nationalizes your assets or operations in Russia, Belarus, or Ukraine."

If the company considers the impact to be immaterial, Corp Fin asks for an explanation.


Note that recent Corp Fin comments on "materiality" in connection with climate disclosure could portend a similar approach here. In a recent analysis by Audit Analytics of the SEC's most recent round of comment letters about climate, Audit Analytics indicated that all of the companies received a second round of comments addressing company responses to the initial round.  The common theme of comments in round two was "materiality"-both quantitative and qualitative. Often, in response to one or more comments, companies advised that they did not disclose certain matters because they were not viewed to be material.  In many of those cases, the SEC indicated that they viewed the companies' responses to be conclusory and pressed the companies to drill down and, as Audit Analytics phrased it, "show their work" in their responses by providing quantitative details or more detailed explanations to justify their conclusions. (See this PubCo post.)

In another sample comment, Corp Fin asks for a description of "the extent and nature of the role of the board of directors in overseeing risks related to Russia's invasion of Ukraine," including "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."

Not surprisingly, most of the sample comments are directed toward MD&A, including known trends or uncertainties "arising from, related to, or caused by the global disruption from, Russia's invasion of Ukraine," critical accounting estimates, and the impact of import and export bans and supply chain disruptions. For example, with regard to critical accounting estimates, the staff requests enhanced disclosure of both qualitative and quantitative information related to new uncertainties associated with the estimate arising out of the conflict, the method used to develop the estimate and the significant assumptions underlying the estimate, changes in the estimate and assumptions during the current period, and sensitivity of the reported estimate "to the method and assumptions underlying its calculation. For example, if the cash flow estimates used were based on assumptions about the invasion or sanctions and those assumptions could significantly impact the estimate, then that should be disclosed along with how sensitive the estimate is to changes in those assumptions."

The sample questions also highlight potentially problematic non-GAAP measures.  For example, adjustments to add an estimate of lost revenue due to the invasion or supply chain disruptions or adjustments for certain expenses incurred related to operations in Russia, Belarus or Ukraine that "appear to be normal and recurring" may not be in accordance with Reg G and related CDIs and could be subject to comment by the staff.

With regard to cybersecurity, the staff asks about "new or heightened risk of potential cyberattacks" and what actions the company has taken to mitigate potential risks. There are also illustrative comments related to changes in internal control and disclosure controls.


At the end of April, the Ukrainian-American Bar Association, a former Ukrainian finance minister and a U.S. charity focused on Ukraine filed a rulemaking petition with the SEC, requesting that the SEC enact a rule requiring issuers to disclose their business dealings in and with the Russian Federation and the Republic of Belarus. Could Corp Fin's new guidance represent a type of response to the petition? The petition requests the SEC to mandate disclosure regarding issuers' sales to and purchases from Russia (direct and indirect), their ownership of assets in Russia and their stakes in entities registered in Russia. The petitioners also advocate that issuers conduct reasonable supply chain due diligence about their customers and suppliers to ensure that their disclosures include indirect transactions in and with Russia. The petitioners contend that the

"varying stances of issuers regarding their business in Russia and the choice of many to continue operating in and doing business with Russia makes information about such activities of vital importance to investors. This information is vital because it provides disclosure to investors regarding the risks and costs of continuing to operate in a heavily sanctioned market ruled by a government moving to nationalize industry. Disclosure will also enable investors and regulators to ensure issuers are meeting the ever more complex sanctions rules regarding operations in the Russian market. Likewise, issuers are concerned that Russia may apply its own counter-sanctions against issuers that do not continue fully their operations within Russia. This proposed disclosure would help investors better understand the cost of doing business in Russia." 

The petitioners believe information about activity with Russia is material to investors regardless of the level of activity.  Even if the monetary amount involved is quantitatively immaterial, petitioners contend, in this context, the information would be material qualitatively, allowing investors to understand issuers' financial exposure-including the possibility of controls on capital and nationalization or expropriation of assets by Russia-and reputational risk-including the possibility of boycotts by customers, employees and investors. Many investors may also want to be sure "that their investments are in no way associated with or contributing to the financing of war by issuers and are not in violation of imposed sanctions." As reflected in the proliferation of investor concerns about ESG, the petition continues, "investors are increasingly expecting businesses to play an active role in broader society and be responsible corporate citizens for the betterment of the world." (See this PubCo post.)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.