Ukraine-Russia conflict – What it means for your financial statements and OFR

The Russian Federation’s invasion of Ukraine and the subsequent global response to those military actions may have significant financial effects on many entities. These include entities with physical operations in Ukraine, Russia and Belarus, as well as those with indirect interests (e.g. suppliers and customers, investors and lenders). Sanctions placed on the Russian government, Russian entities and Russian individuals by many jurisdictions may also impact entities, through situations such as a loss of access to financial resources and trade, and the consequential effects of sanctions on worldwide prices (e.g. oil, natural gas and other petroleum products).

The Russian invasion of Ukraine began on 24 February 2022, so entities must consider all of these factors when preparing their financial statements and the Operating and Financial Review (OFR) for periods ended 28 February 2022 and thereafter. This raises the question, what if 31 December 2021 financial statements are incomplete?

Non-adjusting event for 31 December 2021 and 31 January 2022 financial statements not yet authorised for issue

As the invasion occurred after the reporting date, the effects of the conflict should not be reflected in the 31 December 2021/31 January 2022 financial statements, other than by disclosing the effect of the non-adjusting event.

However, if the effects of the conflict are so significant that an entity’s management has determined it intends to liquidate the entity or cease trading, or that there is no realistic alternative but to do so, then the financial statements would not be prepared on a going concern basis (IAS 10.14), even though the triggering event occurred after period end.

Reporting implications for financial statements of reporting periods ending on or after 24 February 2022

From 24 February 2022 the conflict becomes an ‘adjusting event’ and preparers must consider how sanctions and related flow-on effects could impact the following in their financial statements:

  • Uncertainties regarding going concern
  • Classification of liabilities as current versus non-current
  • Significant estimates and judgements regarding estimation uncertainties – additional, tailored disclosure regarding assumptions is required
  • Impairment of inventories, property, plant and equipment, intangible assets, exploration and evaluation (E&E) assets, and the effect on expected credit losses for receivables and loans
  • Reconciliation of liabilities arising from financing activities – clear disclosure of the effects of refinancing
  • Subsequent event disclosure if the situation changes
  • Recoverability of deferred tax assets
  • Employee benefit provisions (severance pay)
  • Foreign exchange volatility because of the Rouble’s devaluation
  • The need for restructuring provisions and provisions for onerous contracts
  • Modifications or cancellations of share-based payment arrangements
  • Some assets may need to be reclassified as held for sale or discontinued operations if the criteria in IFRS 5 Non-current Assets Held for Sale are met
  • Reduction in ‘earnout’ liabilities incurred as part of a business combination
  • Impacts on assets measured at fair values
  • Whether revenue contracts have been modified
  • Whether lease contracts have been modified.

Boards should consider narrative reporting about the impacts of the conflict in the OFR

Not to be overlooked is the importance of narrative reporting in the OFR. When there is a ‘black swan’ event such as this, boards should consider the following:

  • The disruption to business models and strategy – Will there be a substantial direct or indirect effect on the company? What are those effects? Are they short-term or long-term?
  • Changes in risk profile - Is this seen as an event whose potential impact is pervasive across existing principal risks, or is it a new principal risk in its own right?
  • Mitigating actions - What is being done, or will be done, to address the principal effects of the situation by management and the board? What actions has the board undertaken to assess the immediate and ongoing effects in relation to its role in governance and setting strategy?
  • Stakeholder engagement - Has the board engaged with stakeholders and had regard to their interests in making decisions in relation to this situation?
  • Longer term impact - Has the board considered the long-term effect of decisions about how to navigate this situation?

For the Ukraine conflict in particular, the following (not an exhaustive list) could affect narrative reporting in the OFR:

  • Viability of operations in Ukraine or other relevant sanctioned jurisdictions
  • Direct impact on supply chains
  • Credit risk relating to directly affected customers
  • The effect of sanctions on liquidity, sources of funding or governance and ownership structures
  • Exposure to commodity prices, currency, and stock market volatility
  • Risk of retaliatory actions such as cyber-attacks, which may depend on how critical the entity is to Australian//western infrastructure and key supply chains
  • Future plans and investment decisions
  • Risk of conflict escalation, for example to neighbouring countries.

Addressing the questions raised is likely to touch many different parts of an organisation’s narrative reporting, such as discussion about:

  • Market trends and factors
  • Strategy
  • The business model
  • Principal and emerging risks
  • Going concern and viability
  • Relationships with customers, suppliers, and employees
  • Corporate governance.

Need help?

Some of these financial reporting implications trigger complex accounting issues, such as modification of revenue contracts and leases, as well as share-based payment arrangements. Please contact BDO’s IFRS & Corporate Reporting team if you require assistance.