In the introductory post for this series, we wrote that business leaders need to examine both direct and second-order effects of the war in the Ukraine and sanctions on Russia. Hours after we posted, Sri Lanka suspended payments on its foreign debt as its economic crisis deepened, with the Sri Lanka Ministry of Finance citing the war in Ukraine as one of the contributing factors for the default.

The quarterly reporting season will soon be upon us and, for many, it will be the first-time that registrants report on the impacts of the Ukraine war. Registrants are required to disclose direct and indirect exposures to key risks. The war poses potential impacts to supply chain disruption and commodity price inflation. Companies that have divested or curtailed operations in Russia due to sanctions or voluntary actions will need to quantify the impact in their reporting.

At first glance, an American company may believe their direct revenue and gross profit exposure to be limited, based on the size of the Russian and Ukrainian economies and relative geographic remoteness. Even if impacts are not material, we expect registrants will want to make disclosures to address the uncertainty and ease investor concerns. Importantly, we expect the second-order impacts on petroleum and freight prices to be significant and broadly felt. In addition to obvious effects on transportation costs, oil and natural gas are the curtailment of raw materials essential to many manufactured and industrial products (for example, most plastics) as well as many fertilizers, affecting food production and prices down the road.

As the conflict continues, we expect registrants to report direct impacts first, but to also discuss exposure in various scenarios and their risk mitigation efforts. We also expect registrants to evaluate scenarios where sanctions and/or business disruption broadens to Russian allies, (including Kazakhstan, notable for uranium).

Key areas where recognition and or disclosures will be required or expected include:

1. Disclosures in MD&A, Risk Factors (for S-1s, S-4s, and Form 10s), and Footnotes addressing the direct and indirect impact as of the period end date relating to the conflict. Disclosures of the direct and indirect impact of events subsequent to the period end date through the date of issuance (subsequent events review).
2. Impairments of investments in Russia and potentially Ukraine for businesses, subsidiaries, investments, and joint ventures. This could also include discussions on divestment processes and provisions for winding down existing businesses and/or contracts. Russia has already taken the first steps toward nationalizing foreign-owned businesses in the country and to take control over subsidiary operations and assets (e.g., leased airplanes).
3. Impairments and write-downs of a range of financial and non-financial assets including: inventory, PP&E, rights to use assets, deferred tax assets, prepayments that might no longer be used, goodwill, intangibles, and the entity’s ability to continue as a going concern.
4. One-off charges related to the conflict. Loss contingencies related to contractual obligations. Recognition of obligations associated with changes in employment arrangements (involuntary furlough, terminations, etc.) affecting the timing of the recognition of salaries and benefits provided to employees.
5. Classification of debt or restrictions on bank accounts directly impacted by sanctions imposed affecting an entity’s ability to withdraw funds and use for current operations impacting liquidity and restriction disclosures.
6. Foreign currency / translational losses. The U.S. dollar as a reserve asset has strengthened since the conflict began, and commodity-linked currencies such as the Canadian and Australian dollars and the Brazilian real are expected to strengthen, while the Russian ruble plummeted before recovering somewhat. This may play havoc to comprehensive income as well as impair a company’s ability to transact in a range of currencies.
7. The potential impact, if material, on internal controls, disclosure controls, and procedures. The entity may need to implement new controls or modify existing ones and disclose such changes in controls.
8. Mitigation and risk assessments would need to be planned and disclosed, including possible locking in of forward prices, attempts to diversify suppliers to increase supply chain resilience, and stock-piling key purchased products to avoid stock shortages.