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Understanding Disclosure Considerations Amid the Ukraine Conflict

As the crisis in Ukraine continues, businesses worldwide are facing disruptions, spiking oil prices, and an increasing need to reassess their disclosure strategies in the midst of the 10-K and proxy season. The U.S. and various European nations have imposed substantial sanctions against Russia, which may also impact U.S. companies and capital market participants. The evolving situation warrants careful examination of disclosure requirements, particularly in the areas of risk factors, business descriptions, and management's discussion and analysis (MD&A).

Risk Factors

Pursuant to the August 2020 amendments to Item 105 of Regulation S-K, companies are encouraged to adopt a more principles-based approach in disclosing the most significant factors that make an investment speculative or risky. Businesses affected directly or indirectly by the Ukraine conflict must consider the implications of these events on their operations, financial results, and financial position. This could involve various scenarios, from operations or customer base in Russia or Ukraine, to significant dependency on exports, imports or third parties affected by the crisis, or being materially influenced by oil prices.

Companies must analyze potential risk disclosures and impacts, including loss of substantial operations, uncollectable receivables, significant delays in exports or imports, supply chain disruptions, inability to service customers, possible effects of sanctions and licensing requirements, business boycotts, and political and social ramifications. Additional contemplations may involve personnel, financial transactions, research and development facilities, or properties situated in Russia or Ukraine.

Description of Business

Amendments to Item 101 of Regulation S-K require companies to provide a general development of the business and planned operations. As part of this, companies must consider a range of information, including material bankruptcy, significant effects of reclassifications, mergers or consolidations, acquisition or disposition of assets outside the ordinary course of business, and material changes to previously disclosed business strategy.

Moreover, companies need to consider the impacts of the Ukraine conflict on various facets of their business, including revenue generation, customer base, development efforts, market demand trends, raw material resources, patents or licenses held, potential renegotiation of profits or contracts, seasonal aspects, compliance with material government regulations, and human capital.

Several large companies have suspended operations in Russia, and many airlines have ceased serving Russia due to sanctions. The rapid escalation and response to Russia's actions complicate the assessment of material effects and necessary disclosures.

Management’s Discussion and Analysis (MD&A)

Under the November 2020 amendments to Item 303 of Regulation S-K, companies are required to provide a more principles-based approach to MD&A disclosures. Companies should consider the same factors as discussed above when preparing MD&A disclosures related to the Ukraine invasion. This might involve disclosures around liquidity, capital resources, operational results, off-balance-sheet arrangements, contractual obligations, and known events that may cause a material change in the relationship between costs and revenues.

Additional Disclosures for Large Accelerated and Other Early Filers

While large accelerated filers have already filed their 10-Ks, companies need to evaluate whether additional disclosures are necessary considering current affirmative disclosure obligations. These may include upcoming Exchange Act periodic reports, potential or ongoing registered securities offerings, ongoing share repurchases, or material events triggering an 8-K filing.

Furthermore, if prior disclosures have become materially incorrect due to changing events, even if conditioned by a forward-looking statement disclaimer, companies should consider making a corrective filing and/or public statement. This is to ensure the public information remains current and accurate. The SEC requires companies to disclose any further material information as necessary to ensure the provided statements are not misleading, considering the circumstances under which they were made.