Heads Up — Anticipating the independent private sector audit after the Year 2 conflict minerals reporting cycle
For the second year, registrants subject to the SEC’s final rule on conflict minerals under Section 1502 of the Dodd-Frank Act filed a Specialized Disclosure Form (Form SD) indicating whether conflict minerals (tin, tantalum, tungsten, or gold — commonly referred to as 3TG) necessary to the functionality or production of their products manufactured or contracted to be manufactured may have originated in the Democratic Republic of the Congo (DRC) or an adjoining country.
The current state
The constitutionality of the final rule has been challenged in federal court and may still be an open question despite a recent ruling of the U.S. Court of Appeals for the District of Columbia Circuit (the “Appellate Court”) depending on whether the issue is further litigated (see timeline below). As a result, the SEC has not issued any further guidance to help registrants navigate certain aspects of the final rule.
One of the biggest questions looming as a result of the SEC’s partial stay and the “temporary suspension” of the IPSA requirement is “When will the IPSA be required?” Under the final rule, the temporary transition period for large issuers (during which registrants that declared their products to be “DRC conflict undeterminable” were not required to obtain an IPSA) expired at the end of the calendar-year 2014 filing period. Consequently, registrants are now weighing the odds of whether the IPSA requirement will go into effect for calendar-year 2015 reporting given the following:
- The final rule provides that if a registrant determines through its due diligence process that its conflict minerals originate in the DRC or an adjoining country, the registrant must file a CMR as an exhibit to its Form SD and include an IPSA report. Beginning with calendar-year 2015, this requirement also applies to registrants with products that are “DRC conflict undeterminable” since they must describe those products as “not been found to be ‘DRC conflict free.’ ”
- However, the SEC staff’s April 29, 2014, statement clearly indicates that:
No company is required to describe its products as “DRC conflict free,” having “not been found to be ‘DRC conflict free,’ ” or “DRC conflict undeterminable.” If a company voluntarily elects to describe any of its products as “DRC conflict free” in its [CMR], it would be permitted to do so provided it had obtained an [IPSA] as required by the [final] rule. Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as “DRC conflict free” in its [CMR]. [Footnote omitted; emphasis added]
|Editor’s Note: Although the Appellate Court upheld its initial ruling, final resolution of the legal action challenging the constitutionality of the final rule remains uncertain. Depending on the SEC’s course of action, a series of next steps could ensue. However, it remains difficult to predict a likely outcome of the case and any response by the SEC related to the final rule. Accordingly, we strongly recommend that registrants consult with their SEC counsel to determine whether and, if so, when an IPSA is required.|
Even in light of the uncertainty about the IPSA timing and the temporary IPSA suspension currently in place, many registrants have begun focusing on readiness for an IPSA. Given the unique subject matter and scope of the future IPSA, an increasing number of registrants are looking to obtain a preliminary evaluation of their readiness for an IPSA to (1) allow adequate time for addressing potential gaps and (2) bolster the confidence of management in the sufficiency of the due diligence process that will be subject to the IPSA.
The Year 2 takeaways
While Year 2 conflict minerals filings revealed certain trends that are largely consistent with those found in Year 1 filings, they also highlighted additional implications for a future IPSA. Our evaluation of the Year 2 conflict minerals filing trends focused on the following topics related to the future potential IPSA:
- Disclosure of due diligence measures by OECD step.
- Separation of the reasonable country of origin inquiry (RCOI) and due diligence.
- Suitability of criteria.
- Use of the product label “DRC conflict free.”
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