How to comply with new disclosures for manufactured products Featured

9:22pm EDT March 31, 2013
Dale Jensen, CPA, CFE, partner-in-charge, SEC Practice, Weaver Dale Jensen, CPA, CFE, partner-in-charge, SEC Practice, Weaver

In August 2012, the Securities and Exchange Commission (SEC) issued a final rule regarding the conflict minerals disclosures mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Act). Public companies will be required to disclose whether they use conflict minerals such as tantalum, tin, tungsten and gold in their manufactured products — and whether the minerals originated from one of the “covered countries” defined by the Act.

“This rule could be very broad reaching, with the SEC estimating approximately 6,000 issuers will be required to provide new disclosures under the rule. Many private companies may also be impacted,” says Dale Jensen, partner-in-charge of Weaver’s SEC practice.

Smart Business spoke with Jensen about how to prepare for compliance.

Why do companies need to be concerned with supply chains now?

Hundreds of products contain conflict minerals, from cell phones and laptop computers to jewelry, golf clubs, drill bits and hearing aids. The SEC estimates that thousands of public companies will have to provide the new disclosures, and many private companies that are part of the impacted public companies’ supply chains may also be affected. Additionally, they estimate the initial compliance costs to be $3 to $4 billion, with subsequent costs of more than $200 million annually.

Who is impacted by this new rule?

Public companies, foreign private issuers, emerging growth companies and smaller companies must all comply. Packaging essential to the product’s function, such as a tin can, is also covered, but materials purchased or inventoried before Jan. 31, 2013, should be outside the rule’s scope.

Retailers are not required to report on products bought or resold, only manufactured or contracted to manufacture. When contracting, the retailer’s degree of influence determines compliance, though it doesn’t need to be substantial.

What’s involved with complying?

First, a company should determine whether any products it manufactures or contracts to be manufactured contain conflict minerals necessary to functionality or production. If the minerals are necessary, but they didn’t come from covered countries or are from scrap or recycled sources, the company’s inquiry method and conclusion has to be annually disclosed on SEC Form SD. This information must also be posted on the company’s website.

However, if there’s reason to believe the minerals originated from covered countries, their origin is unknown, or they may not be from scrap or recycled sources, the company must perform due diligence on the source and chain of custody of the minerals.

After due diligence, if the issuer determines that its conflict minerals are from a covered country and not from scrap or recycled sources, the company will be required to file a Conflict Minerals Report as an exhibit to Form SD. An independent audit of the Conflict Minerals Report is required. The SEC estimates that 75 percent of companies subject to the Act will need to develop a Conflict Minerals Report and have it audited.

What is the timing for compliance?

The first filing isn’t due until May 2014 for the 2013 calendar year, but complying may require substantial preparation for public companies. Companies will also need to file a new Form SD annually by May 31.

What are some next steps for companies?

Management must determine whether the new rule impacts the company, prepare cost estimates for compliance and put a plan in place. Companies should identify products that may contain conflict minerals as soon as possible, keeping in mind that they must comply even if the product contains only small traces of a mineral. Companies should be prepared to report results on a product-by-product basis. Finally, they should work with advisers to develop policies and procedures for supply chain vetting, filing Form SD, and if needed, conducting due diligence and preparing and auditing Conflict Minerals Reports.

Dale Jensen, CPA, CFE, is partner-in-charge, SEC Practice, at Weaver. Reach him at (972) 448-9283 or Dale.Jensen@WeaverLLP.com.

Blog: To stay current on audit, tax and advisory issues that may impact your business, visit Weaver’s blog.

Insights Accounting is brought to you by Weaver