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U.S. Securities and Exchange Commission

FAQ About the Statement of the Commission Regarding Disclosure of Year 2000 Issues and Consequences by Public Companies


(Release Nos. 33-7609; 34-40649; International Series Release No. 1168)


AGENCY: Securities and Exchange Commission

ACTION: Publication of Frequently Asked Questions

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 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.

By the Commission.

Jonathan G. Katz