[Federal Register Volume 63, Number 220 (Monday, November 16, 1998)]
[Notices]
[Pages 63758-63759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30512]
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SECURITIES AND EXCHANGE COMMISSION
[Release Nos. 33-7609; 34-40649; International Series Release No. 1168]
Frequently Asked Questions About the Statement of the Commission
Regarding Disclosure of Year 2000 Issues and Consequences by Public
Companies
AGENCY: Securities and Exchange Commission.
ACTION: Publication of Frequently Asked Questions.
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SUMMARY: The Securities and Exchange Commission (``we'' or
``Commission'') is publishing guidance in the form of Frequently Asked
Questions to clarify some recurring issues raised by the Commission's
earlier guidance to public companies regarding Year 2000 disclosure
obligations.
EFFECTIVE DATE: November 9, 1998.
FOR FURTHER INFORMATION CONTACT: Joseph Babits, Office of Chief
Counsel, Division of Corporation Finance at 202-942-2900.
Year 2000 Disclosure Frequently Asked Questions
The Commission's earlier guidance on Year 2000 disclosure
obligations is in our interpretive release entitled ``Statement of the
Commission Regarding Disclosure of Year 2000 Issues and Consequences by
Public Companies, Investment Advisers, Investment Companies, and
Municipal Securities Issuers'' (Rel. No. 33-7558, Jul. 29, 1998)
(``Release'').
Companies typically address their Year 2000 issues as part of their
Management's Discussion and Analysis of Financial Condition and Results
of Operation, found in Item 303 of Regulation S-K and S-B (otherwise
known as ``MD&A''). The MD&A section can be found in companies' annual
and quarterly reports. The Release and these FAQs primarily interpret
MD&A in the Year 2000 context.
We intend to continue reviewing Year 2000 disclosures until
companies no longer face material Year 2000 issues. As our Division of
Corporation Finance reviews Year 2000 disclosure, companies may receive
comments on their disclosure.
Since the issuance of the Release, interested persons have raised
several questions. The following addresses the most frequently asked
questions:
Can a Company Comply With the Release's Guidance if it Does Not Respond
to Every Issue Described in the Release?
The Release should not be used as a ``checklist.'' Merely because a
matter was addressed in the Release does not mean it applies to every
company. The Release interprets many rules and regulations in the Year
2000 context. However, as stated in the Release, for Year 2000
disclosure to be meaningful, companies for which Year 2000 issues
present a material event or uncertainty have to address four categories
of information: state of readiness; costs; risks; and contingency
plans. The level of detail that a company provides under each category
depends on each company's facts and circumstances.
What constitutes meaningful disclosure for some of these categories
may vary over time. For example, the information elicited by the risks
and contingency plan categories are likely to be more important in 1999
than 1998. Accordingly, the level of detail for those categories may
grow each quarter. For the cost category, disclosure is required only
if historical or estimated Year 2000 costs are material. Finally, the
Release suggested that companies disclose certain matters and gave
examples of
[[Page 63759]]
situations that do not apply to every company.
Under the ``cost'' category, what should be included as a Year 2000
cost?
The Release states that companies must disclose material historical
and estimated costs. The types of Year 2000 costs will vary for each
public company. Typical costs include external consultants and
professional advisors; purchases of software and hardware; and the
direct costs (e.g., compensation and fringe benefits) of internal
employees working on Year 2000 projects. Companies often disclose the
types and amounts of Year 2000 costs to their Board of Directors or
Audit Committee. If internal costs are not known, that fact should be
disclosed. If a company has records of some but not all of its internal
costs, then disclosure of the type and amount of these known costs
should be made, along with the types of internal costs incurred for
which the company cannot determine the amount.
For example, a semiconductor manufacturer has hired outside
consultants to assist its internal information systems group to address
its Y2K issues. The company's plan includes upgrading existing software
applications to make them Y2K compliant, replacing some hardware
required by the software upgrade, fixing some internally created
software code, and contacting suppliers of various services and
materials regarding their readiness and plans for Y2K. The Company does
not have a project tracking system that tracks the cost and time that
its own internal employees spend on the Y2K project. It is expected the
Company would disclose:
The costs incurred to date and estimated remaining costs
for the outside consultants, software and hardware applications.
A statement that the company does not separately track the
internal costs incurred for the Y2K project, and that such costs are
principally the related payroll costs for its information systems
group.
Under the ``Risks'' Category, What Level of Detail Should a Company
Include in its ``Reasonably Likely Worst Case Scenario''?
Under this category, companies must describe potential consequences
that they believe are reasonably likely to occur. The ``reasonably
likely worst case scenario'' is intended to elicit disclosure of the
impact on a company if its systems, both information technology and
non-information technology, do not function and it has to implement its
contingency plan. For example, if a company is uncertain about a
supplier and its contingency plan is to stockpile inventory, then
disclosure of this potential consequence and its costs are required.
Companies need not address all possible catastrophic events, including
failure of the power grid or telecommunications, unless a company
becomes aware that a material disruption in these basic infrastructures
is reasonably likely to occur.
However, if a company is unable to obtain assurances as to whether
a material and significant relationship, such as a key supplier for raw
materials, components or electrical power for a manufacturer, will be
impacted by Y2K, then a statement to that effect should be made. For
example, if a company buys component parts from a sole supplier, and
that sole supplier is unwilling to disclose if its parts will be Y2K
compliant, and as a result of that, the company is unable to determine
if its products will be Y2K compliant, a statement to that effect
should be made. Disclosure of the related contingency plan, in the
event the supplier is not Y2K compliant, such as switching to another
supplier, and the ability to make such a switch, should also be
discussed.
What is an example of good Year 2000 disclosure?
This is probably the most frequently asked question. The SEC
historically has not identified any particular disclosure as ``good''
disclosure for a variety of reasons. We recognize the potential value
of pointing out good disclosure, but there are good reasons not to do
so, including the risk of establishing a boilerplate template and the
differing circumstances each company and industry faces. The best way
to draft meaningful disclosure is to closely read the Release and the
existing rules and regulations that the Release interprets.
Due to the importance of the Year 2000 issue, after we are able to
review the quality of the Year 2000 disclosure in the third quarter
Form 10-Qs which will be filed by mid-November, we may provide some
sample Year 2000 disclosures. The purpose of these samples would be to
illustrate how companies should be following our guidance. We would
provide different types of samples to show how ``one size doesn't fit
all'' for Year 2000 disclosure.
Dated: November 9, 1998.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30512 Filed 11-13-98; 8:45 am]
BILLING CODE 8010-01-P
