The Russian invasion of Ukraine is continuing to wreak havoc in eastern Europe. The human toll, including both losses of life and massive displacements, and the ongoing military operations have disrupted the Ukrainian economy with inevitable consequences on neighbouring countries' politics, people, and economies.
Add to that the sanctions placed on Russia and Belarus by various governments, the energy interdependency of these countries, and the ripple effects on global markets are pervasive and unpredictable.
The extent to which these events affect any individual company will vary. But all private and public companies should consider these macroeconomic shifts, market disruptions, and significant uncertainties when preparing their financial statements.
This blog identifies the financial reporting disclosure topics that may be relevant to many companies. Some of these disclosure considerations are governed by both US GAAP and IFRS.
Accounting Disclosure due to the Russian invasion of Ukraine
- The financial statements must be prepared to assume that the Company will continue as a going concern.
- While the Russia-Ukraine war may not directly affect a company, indirect effects could be unusually disruptive for some companies, particularly as the war continues and sanctions come into force.
- Remember that under US GAAP and IFRS, disclosure is required if conditions or events raise substantial doubt, even if management's plans alleviate those doubts.
Some subsequent events require recognition in the financial statements. These events occur after the balance sheet date but provide additional evidence about conditions at the balance sheet date.
Other subsequent events are not recognized in the financial statements. These events occur after the balance sheet date and provide evidence about conditions that did not exist at the balance sheet date.
A subsequent event not recognized in the financial statements "may be such a nature that disclosure is required to keep the financial statements from being materially misleading."
In these circumstances, the Company must disclose the event's nature and an estimate of the financial effect. In some cases, pro forma information may be appropriate. That fact should be disclosed if an estimate cannot be made.
Given the volatility and unpredictability of significant events in the current environment, management may need help to distinguish between those subsequent events that should be recognized in the financial statements and those that should not.
Under US GAAP and IFRS, some loss contingencies are recognized in the financial statements, and some are not. But both recognized and unrecognized loss contingencies can require disclosure.
Disclosure of the nature and amount of the contingent loss may be required to keep the financial statements from being materially misleading.
Unrecognized loss contingencies may also require disclosure. If it is reasonably possible that a loss has been incurred or the amount of a probable loss cannot be reasonably estimated, no accrual is appropriate. However, disclosure of the nature of the contingency and an estimate of the possible loss or range of loss may be required.
The ongoing Russia-Ukraine war could result in many losses for businesses, including international companies that sell goods or provide services to countries near the border.
Future operating losses do not meet the definition of a loss contingency or expected losses on firmly committed executory contracts.
Changes in Estimates
Changes in estimates made in the ordinary course in accounting for items such as inventory and uncollectible receivables generally do not require disclosure. However, disclosure is required if;
(a) the Company changes an estimate that affects several accounting periods or
(b) a change in estimate is material.
US GAAP encourages (but does not require) companies to disclose supplementary information about the effects of inflation on financial statements. These supplemental disclosures are unlikely to be meaningful for short bursts of inflation but may become relevant if current inflationary trends continue.
As measured by the Consumer Price Index, inflation rates began rising before the Russia- Ukraine war began. However, sanctions resulting from the war combined with ongoing COVID- 19 issues in China appear to exacerbate inflationary pressures. The war is not the sole reason for inflation, but it may be a contributing factor.
Examples of accounting disclosures
On September 30, 2022, we announced the discontinuation of our business in Russia. ABC's revenues in Russia for the six months that ended September 30, 2022, were $91,928.
Long-lived Assets and Goodwill
This footnote was included in the unaudited financial statements for the quarter that ended on March 31, 2022. It represents a revision of the accounting policy footnote for long-lived assets and goodwill impairment included in the Company's most recent Form 10-K. The Company's Form 10-Q was filed on May 2, 2022.
Example from Mcdonald's Quarterly report -
"Long-lived assets and Goodwill are typically reviewed for impairment annually in the fourth quarter and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable or if an indicator of impairment exists. The recent military conflict between Russia and Ukraine has created significant market uncertainty and risk.
The Company temporarily suspended operations in Russia and Ukraine during the first quarter of 2022. The Company continues to monitor the economic uncertainty while assessing the financial impact and outlook for restaurant operations in these markets. As a result of the Company's analysis and considering the totality of events and circumstances, no impairment was recorded during the first quarter of 2022.
As of March 31, 2022, the Company's net investment in Russia and Ukraine was approximately $600 million, primarily consisting of building and equipment assets. In addition, there were approximately $725 million of cumulative foreign currency translation losses reflected in the AOCI section of the condensed consolidated statement of shareholder's equity on March 31, 2022. "
Impairment of assets - Extract from Exxon Mobil
This footnote was included in the unaudited financial statements for the quarter that ended on March 31, 2022. It represents an impairment-related disclosure for an asset group that resulted from management's decision to discontinue a project in Russia. It includes a discussion of key assumptions used to develop the fair value of the asset group. The Company's Form 10-Q was filed on May 4, 2022.
"In early March, in response to Russia's military action in Ukraine, the Corporation announced that it plans to discontinue operations on the project and develop steps to exit the venture. In light of this and given the considerable uncertainties surrounding the ongoing operation and future cash-flow generating capability of [Project], an impairment assessment was required, and management determined that the asset group's carrying value was not recoverable. As a result, the Corporation's first quarter earnings include after-tax charges of $3.4 billion, mainly representing the impairment of its operations related to Sakhalin. The charges amounted to $4.6 billion before tax, reflected in the line captioned "Depreciation and depletion (including impairments)" on the Condensed Consolidated Statement of Income. The Corporation's exit from the Project would result in quantities estimated at 150 million oil-equivalent barrels no longer qualifying as proved reserves, representing less than one per cent of the Corporation's 18.5 billion oil-equivalent barrels of proved reserves at year-end 2021.
The assessment of fair value required the use of Level 3 inputs and assumptions that are based on the views of a likely market participant. As of March 31, the pool of market participants for Russia-based upstream assets was minimal. In arriving at a fair value for its interest in Project, the Corporation considered, among other things, the current state of sanctions, the regulatory environment within Russia, the statements and actions of potential market participants, and the range and risks of future cash flows that a market participant might consider. Given these significant uncertainties, the likelihood of a third-party market participant agreeing to engage in a transaction for the Corporation's interest in Project, as of March 31, was considered remote."
•The Russian invasion of Ukraine continues to wreak havoc in eastern Europe, with devastating consequences for the people and economies of both countries.
• The human toll, including losses of life, displacements, and ongoing military operations, disrupted the Ukrainian economy.
• This inevitably affects neighbouring countries' politics, people, and economies.
• In addition to the sanctions placed on Russia and Belarus by various governments, the energy interdependency of these countries means that ripple effects on global markets are pervasive and unpredictable.
Some of these disclosure considerations are governed by both US GAAP and IFRS. Companies should monitor developments closely and consult with qualified accounting professionals to ensure proper disclosure in their financial statements.