The War in Ukraine and the Financial Reporting Implications
Released On 14th Mar 2022
The commencement of the war in Ukraine and the sanctions being placed upon Russia and Belarus, will have business consequences for some, which will have a knock on effect on the financial statements.
Below are some of the key considerations for directors of medium and large organisations.
Everything has changed since the year end
You may find that there are events which have taken place after the date to which your financial statements will be prepared which are having a large impact on the way in which the business is now operating. This may be due to trading relationships with Russia, Belarus or Ukraine, assets held in or relating to those locations or because of wider implications such as increased energy prices, the impact on inflation and interest rates and the instability of the financial markets. These situations and changes in circumstance may require adjustment to your financials or additional disclosure within your financial statements.
Where you have a reporting date prior to the end of February 2022, it is our view that the impacts of the war in Ukraine are non-adjusting events. This means that disclosure should be made about the impact of the events on your business but there will be no change to the recognition and measurement of the figures.
If you have a reporting date of the end of February 2022 or later then the impact of the war in Ukraine will instead be an adjusting event. Items recognised in the financial statements and their valuation may require adjustment based on the information that we now have.
The value of assets in the business has changed.
Assets are generally held within the financial statements at cost or open market value. The current economic environment may impact the values of the assets recognised in your financial statements. This is particularly relevant for businesses who have Russian, Belarussian or Ukrainian assets relating to gas or oil or who have these countries in their sale or supply chain.
This could result in the need for a reduction in asset value, as well as a disclosure note to explain the reasons for this.
What is the impact on stock?
Stock is held within the financial statement at the lower of cost and the selling price of an item less, the costs to sell it. If a product can not be sold or can no longer be used, or it can not be located then there may be a reduction in the value of the stock to below its original cost.
The valuation of work in progress at the reporting date will also need to be reviewed to ensure that it reflects the cost of the future work to be undertaken, the final valuation of the end product and the likelihood of its future sale. This may again result in a reduction to the value of a project at the end of the reporting period.
What if I have funds in Russia?
Companies that hold any funds in Russian bank accounts or have loan relationships with Russian companies will need to reconsider their value at the reporting date given the economic sanctions in place and the value of the currency.
Going Concern
The way in which financial statements are prepared will change if a conclusion can not be reached that a business is a going concern. In order to ensure a business is a going concern, management must review all available information into the future, for a period of at least 12 months from the date that the financial statements are authorised for issue.
Only if management intends to liquidate an entity or cease trading or has no realistic alternative but to do so will the going concern standard not be met. This is a high bar, however if an organisation is severely impacted by the war then this could see a business move to a position where it can no longer continue and therefore the basis of preparation for the financial statements would need to change.
Alternatively it could be the case that there are significant doubts as to whether or not a business is a going concern and in which case disclosure of the uncertainties causing these doubts would be required but the basis of preparation would remain unchanged.
Accounting Estimates and Judgements
FRS 102 requires disclosure of significant accounting policies, judgements, and estimates. Those which have been disclosed in previous years may now need review or additional points added to them on the back of the points raised above.
Narrative Reporting
The strategic report includes a specific requirement to set out the principal risks and uncertainties facing the business as well as any mitigating actions to be taken.
Depending on the war’s impact on a business, there could be risks or uncertainties which are considered material and may therefore need disclosure. This is likely to be the case where adjustments have been made to the numbers in the financial statements or additional disclosure notes have been included.
