Y2k Reporting For Fasb Essay Research Paper

INTRODUCTION

I have reviewed an article and financial disclosures by Chevron, Inc. pertaining to Y2K disclosure reporting. The article, SEC Interpretative Release on Disclosure of Year 2000 Issues by Gary Illiano and Joseph Bentz addresses the issue of reporting Y2K losses. Reporting Y2K losses is a contingency issue and should not be ignored or reported ambiguously. The SEC has made this a mandatory disclosure for material losses due to the Y2K issue effective November 9, 1998. The SEC requires companies to disclose information on the issue in their Management s Discussion and Analysis of Financial Condition and Results of Operation Portion of their annual and quarterly reports. (The guidelines for this are in located in the Staff Legal Bulletin No. 5). However, companies have not been providing sufficient disclosure information. To provide a more stringent guideline in the reporting, the SEC has recently issued an interpretative release. In this paper I will discuss the reason for disclosure and what needs to be disclosed. I will also discuss the Readiness Disclosure issued by Chevron, Inc.

REASON FOR DISCOSURE

Disclosure of Y2K information is relevant to a company s current and future financial status. Investors have the right to know what money has been invested in Y2K projects to date as well as future estimates of Y2K costs. Companies may not only be spending large amounts of capital on fixing, replacing, and changing systems, but they may also lose large amounts if third parties that the company is involved with are not Y2K compliant. From a company s standpoint, a good reason to disclose as much information as possible is to avoid possible litigation from the investors or third parties.

WHAT TO DISCLOSE

The company must address four main categories of information:

1. State of readiness

+ This includes describing the material event, information about the IT systems and non-IT systems, status of the process they are undertaking to correct Y2K problems, and third party issues.

2. Costs to Address the Company s Year 2000 Issues

+ Historical and estimated future costs of Y2K compliance

3. Risks of the Company s Year 2000 Issues

+ Worst case scenarios and how the company plans to handle them. Must report estimate material revenue loss due to Y2K issues.

4. Company s Contingency Plan

There are many other suggestions of additional information to disclose mentioned by Illiano and Bentz in the article. These should all be taken into account when a company analyzes their risks. It should report as much as possible to minimize the possibility of litigation from investors.

CHEVRON CORPORATION DISCLOSURE

Of all the companies that I reviewed their disclosure statements that I reviewed, the most detailed was issued by Chevron Corporation. Chevron has been issuing a Readiness Disclosure report since March of 1998. It has disclosed that its historical cost through December 31, 1998 is $75 million. Estimated cost to completion is $250 million. The company also reports that these costs are expectations, estimates and projections, which could ultimately prove to be inaccurate (Chevron, 4). It also discusses the possible internal and external environmental effects, such as, failure to achieve expected production and future environmental regulations, respectively. The statement briefly notes potential liability resulting from pending or future litigation. It does not, however, discuss what pending litigation there is at this point.

CONCLUSION

The SEC requires year 2000 disclosure of historical and future losses. Companies must report all information affecting them with regards to state of readiness, costs (past and future), risks of the company, and any contingency plans currently in place. These disclosures are necessary to provide investors with the information they are entitled to and to minimize the possibility of litigation.