The war in Ukraine is a humanitarian tragedy, and even worse, it shows no signs of ending any time soon. Now corporations need to confront a tricky financial reporting question: What should you disclose to investors about how the war in Ukraine is affecting your business?

Calcbench first wrote about Russia’s invasion of Ukraine at the beginning of March, when the war first started and nobody had any idea how events would unfold. Even then, a few firms began making some disclosures about the war’s effect in their operations, typically saying something in their Management Discussion & Analysis.

The issue is on our minds again now for two reasons. First, multiple companies have started citing the war as reason for a non-GAAP adjustment to net income. Second, the Securities and Exchange Commission just published a sample comment letter asking about the war’s effect on corporate reporting — a letter that told companies to tread carefully when putting a Ukraine non-GAAP adjustment in the earnings release.

Let’s start with the disclosures themselves.

Some of the disclosures are straightforward. Owens Corning ($OC), for example, filed its latest earnings release on April 27. Included in the release was this note:

In late March, Owens Corning made the decision to exit Russia through a transfer or sale of its facilities and, earlier this month, halted all future investments in Russia. The company is working to expedite its exit, while remaining committed to the safety and security of its employees in the country. 2021 net sales in Russia were approximately $100 million, or about 1 percent of the company’s consolidated net sales.

That’s all Owens Corning had to say about things. While the company did include various non-GAAP adjustments to net income (like just about every other firm out there), an adjustment for lost business in Ukraine and Russia was not among them. But providing a sense of net sales in Russia in 2021 does give investors some sense of proportion.

More interesting is Philip Morris International ($PM). The tobacco giant filed an earnings release on April 24 and did include adjustments for lost revenue in Russia and Ukraine. See Figure 1, below.

Philip Morris then provided an updated forecast for 2022, where the company did include that $0.10 adjustment for first-quarter 2022, and then assumed no other revenue from either country for the rest of the year. See Figure 2, below.

Further down, Philip Morris also discloses that Ukraine accounted for less than 2 percent of total revenue in 2021 (Philip Morris revenues were $31.4 billion last year, so Ukraine was somewhere less than $628.1 million) and the company’s Ukrainian assets were worth about $400 million. Meanwhile, total Russia revenue in 2021 was about $1.9 billion (6 percent of revenue) and assets in country were valued at $1.4 billion.

A final example comes from heavy-industry manufacturer Cummins ($CMI), which filed an earnings release on May 3 that includes detailed breakdowns of which divisions suffered how much costs due to Russia disruptions. Total costs were $158 million, which Cummins first disclosed across its five operating segments. See Figure 3, below.

Separately, Cummins also included a narrative explanation of its Russia charges. They included inventory write-downs, asset impairments, and accounts receivables that presumably will never arrive. Within that narrative note Cummins also included another table, shown below, that breaks down the $158 million another way.

Meanwhile, the SEC Says…

We still have that sample comment letter from the SEC, published at the beginning of May. The letter raised two points about non-GAAP adjustments related to Ukraine.

First is the idea of adjusting for lost revenue due to Russia’s invasion of Ukraine. The SEC’s terse directive: “Please remove these adjustments.” Why? Here’s the full explanation in the comment letter:

We note your adjustment to add an estimate of lost revenue due to [Russia’s invasion of Ukraine and/or supply chain disruptions]. Recognizing revenue that was not earned during the period presented results in the use of an individually tailored revenue recognition and measurement method which may not be in accordance with Rule 100(b) of Regulation G. Please remove these adjustments.

Basically, if you include a non-GAAP adjustment for revenue that never actually, ya know, existed — that’s a no-no under SEC reporting rules.

Second, the SEC is also on the lookout for adjustments that a company claims are related to Ukraine, but perhaps are just normal and routine costs of business. In that case, the SEC will be looking for more fulsome disclosure about whether a company’s one-time Ukraine adjustments really are as one-time as it claims:

We note your adjustment for certain expenses [such as compensation expense or bad debt expense] incurred related to your operations in Russia, Belarus, and/or Ukraine that appear to be normal and recurring to your business. Please tell us the nature of these expenses. Explain how you have considered Question 100.01 of the Division’s C&DI for Non-GAAP Financial Measures and why you believe that the expenses excluded from your non-GAAP measures do not represent normal, recurring operating expenses.

The rest of the comment letter addresses other disclosure issues, such as what goes into Management Discussion & Analysis, cybersecurity risks, and internal control over financial reporting. All of the comment letter is food for thought for analysts; if the SEC is wary of what companies are reporting about Ukraine issues, those issues are worth keeping on your radar screen too.