There are some obvious consequences of the war in Ukraine on companies and their corporate reports, particularly companies with trade and/or assets in Russia, Belarus or Ukraine. However, it is important to consider the wider economic implications such as increases to energy prices, rising pressure on inflation rates, fluctuations in foreign exchange rates, unease in stock market trading and interest rate rises.
It can be difficult to assess the conditions which existed on a particular date while the situation is rapidly evolving. This is where robust disclosure of judgements and estimates are of critical importance.
This guide serves to highlight key areas of financial and non-financial reporting that companies might consider at this stage, in light of the ongoing war in Ukraine. This is an overview that is not specific to IFRS or UK GAAP and is not a substitute for reading the relevant requirements within accounting standards and legislation.
Post Balance Sheet Events
A fundamental principle in the preparation of accounts is that they should reflect the conditions that existed at the balance sheet date.
Events after the end of the reporting period include all events up to the date when the financial statements are authorised for issue. It is important to incorporate a comprehensive post balance sheet review in the year-end reporting plan, particularly as information about the scale and the impact of the war changes frequently.
The general requirement is that the balance sheet reflects the position at the end of the reporting period. While tensions were rising between Russia and Ukraine in the months prior, the news of Russia’s invasion into Ukraine broke at the end of February 2022. So for companies with December and January year ends, the general consensus appears to be that the war in Ukraine would be a non-adjusting post balance sheet event. Therefore, the measurements of assets and liabilities in the accounts will not be adjusted for its potential impact (unless the impact is so far reaching that the entity is no longer considered to be a going concern).
However, the nature of any material non-adjusting event and an estimate of its financial effect must be disclosed by way of a note to the accounts. Therefore, directors will need to consider the impact of the war in Ukraine on the business, which will vary according to the specific circumstances in which it operates. This assessment will involve considering the impact of sanctions where relevant but will also involve considering the impact of the war in the countries in which it operates, on the supply chain and the broader impact on the global economy.
In a continually evolving situation, establishing what is adjusting and what is non-adjusting may involve a significant amount of judgement. The war in Ukraine consists of a series of events that are continuing to evolve; therefore, companies will need to monitor the changing circumstances and think carefully about which of these events provide additional evidence of conditions that existed at the balance sheet date and should, therefore, be adjusted for.
When an event is determined to be an adjusting event, a business will need to review all areas of the accounts that are subject to judgement and estimation uncertainty that might be adversely affected by the war.
In a typical business, most assets are measured at cost or amortised cost. However, when the income or benefits the asset is expected to generate (ie, its recoverable amount) are lower than its carrying value, based on conditions that existed at the end of the reporting period, the asset is impaired and must be written down. Accounting standards, for both IFRS and UK GAAP, have specific requirements which address how and when to test for impairment. See the next section for further considerations around asset impairments.
Other areas of the accounts that are dependent on valuations, judgements and estimates include, but are not limited to, share-based payments, pension obligations, tax (including deferred tax), receivables, fair value measurements and onerous contracts.
Generally, an entity must disclose key assumptions about the future and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing material adjustments to the carrying amounts of assets and liabilities in the next financial year. It could be appropriate to disclose a range of possible outcomes considered based on more than one scenario.
Impairment of Tangible and Intangible Assets
For most asset types, entities are required to make an assessment at each reporting date of whether there is an indication that an asset may be impaired under both IFRS and UK GAAP accounting standards. For companies that have established the war in Ukraine and any associated repercussions to be materially affecting their business before the reporting date, this will be a factor to consider when making such assessments.
Companies with Russian, Belarussian or Ukrainian assets will almost certainly need to undertake impairment reviews as the external impairment indicator is clearly present: "A significant adverse change in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated."
Other situations whereby the war in Ukraine could be considered an impairment indicator include but are not restricted to:
- Businesses that involve Russia/Belarus/Ukraine in their supply chain may struggle to satisfy performance obligations (if alternatives are not available), which would negatively impact future cash flows.
- Businesses that are vulnerable to increases in energy prices would suffer an increase to their cost base, also negatively impacting future cash flows.
- Businesses that export to, or have large contracts with, customers in Russia/Belarus/Ukraine, should consider the impact on future cash flows of losing some or all of this revenue stream.
Even when assets are not considered to be impaired, residual values and useful economic lives may still require reassessment.
Value of Cash, Receivables and Inventories
Companies that hold any funds in Russian bank accounts or hold loans due from Russian companies should consider their value at the reporting date given the economic sanctions in place. Consideration may also need to be given to restricted cash disclosures.
Companies should consider if they have inventory they can no longer access or sell because it is located in Russia or Ukraine or it is custom-made for customers in these countries. Consideration should also be given to potential changes in consumer behaviour whereby consumers may choose not to engage with those in, or with links to, Russia or Belarus. If affected, inventory will need to be written down if the net realisable value is less than its carrying value.
Those that have a customer base in Russia/Belarus/Ukraine, will need to review the recoverability of debtor balances. To the extent that there is evidence that debtors were not recoverable as at the balance sheet date, they must be written down immediately. IFRS reporters may also need to consider any relevant modifications to their expected credit loss model.
The situation in Ukraine is adding to pressures already being felt by many businesses from the after-effects of the COVID-19 pandemic, for example price increases and cash flow demands. An entity that is severely affected by the war in Ukraine, or an entity for which the Ukraine situation adds to existing difficulties, may need to consider additional disclosures of any material uncertainties which cast significant doubt over its ability to continue as a going concern.
When assessing whether the going concern assumption is appropriate, management must take into account all available information about the future, which is at least, but not limited to, 12 months from the date that the financial statements are authorised for issue.
If management conclude that the entity is a going concern and there is no material uncertainty, the financial statements should be prepared on a going concern basis. If, in reaching this conclusion, management had to apply significant judgement, then this judgement should be disclosed.
Accounting standards set a high threshold for departing from the going concern basis. An entity is a going concern unless management either intends to liquidate the entity or cease trading or has no realistic alternative but to do so.
If the company is no longer considered to be a going concern the financial statements should not be prepared a going concern basis and the entity should disclose this fact together with the reason(s) why and the basis on which the financial statements have been prepared.
Other Matters – Distributions
Directors will need to consider whether they can legally pay a dividend, in particular whether losses after the accounts have been drawn up have depleted distributable profits and whether the company will, following the payment of the dividend, be solvent and continue to be able to pay its debts as they fall due. More information on capital maintenance law and directors’ duties is available in the Introduction to the Law on Dividends.
Presentation and Disclosure
Some businesses will be looking to demonstrate the impact that the war in Ukraine has had on their business, potentially presenting the results in a different way. For example, companies will need to consider whether additional items of income and expenditure arising (rather than, for example, the absence of expected income) should be separately disclosed, considering both gains and losses. Any Alternative Performance Measures (APMs) should be clearly explained and reconciled to the closest IFRS or UK GAAP measure, and should not be given greater prominence.
Depending on the extent and the way in which an entity is affected by the war in Ukraine, additional disclosures are likely to be required. All companies must ensure the financial statements give a true and fair view, therefore, judgement must be applied when considering whether further disclosures, over and above those specifically required by accounting standards, will be needed. In particular, IFRS reporters may need to give additional attention to IFRS 7 Financial Instruments: Disclosures and IFRS 13 Fair Value Measurement disclosures where there is heightened risk and uncertainty arising over financial instruments and valuations.
Entities required to produce a strategic report, that have been or are likely to be significantly affected by the war in Ukraine, should describe the impact of these events as part of a fair review of the business. This might include, for example, the impacts on business model and strategy. There is also a requirement for the directors’ report to include particulars of important post-balance sheet events, which may be included in the strategic report, where considered of strategic importance.
Some companies will need to consider whether to refer to the possible impact of the war in Ukraine in their reporting of principal risks and uncertainties. When mitigating actions can be taken, these should also be reported alongside the description of the risk itself. The situation may also impact an entity’s severity of exposure to existing principal risks such as cyber risks or inflationary pressure. Companies might wish to consider integrating the effects of the war in Ukraine into their existing risk reporting rather than identifying a separate principal risk.
Entities preparing a viability statement should consider explaining the key Ukraine related assumptions within each forecast and how these impact viability conclusions.
Consideration also ought to be given to the section 172(1) statement requirements for companies that produce one. The Financial Reporting Faculty guidance for section 172(1) statements explains these requirements and who they apply to.
Certain companies will need to consider the impact of recent events on other areas of narrative reporting such as non-financial information statements and corporate governance statements.
In those circumstances when such disclosure is not required, it may nonetheless be useful to provide information above the minimum required by law as it may be of interest to stakeholders such as customers, lenders or suppliers.
ICAEW’s Financial Reporting Faculty and Technical Enquiry Service will be monitoring events and the need for further guidance. We’d welcome your feedback; please get in touch at firstname.lastname@example.org.
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