[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]


-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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