Accounting treatment for the event of invasion of the Russian Federation in Ukraine

The Russian Federation’s invasion of Ukraine and the subsequent global response to those military actions will have significant financial and reputational effects on many entities. These include entities having business with partners in Ukraine, Russia, and Belarus, as well as those who may be affected indirectly, e.g. via supply chain disruptions, availability of resources and their price adjustments, or due to reputational issues.

Some Latvian IFRS reporting entities raise questions whether the invasion is an adjusting or non-adjusting event, and what information should be disclosed in the context of such events.

Russia invaded Ukraine on 24 February 2022, therefore, for an entity with a 31 December 2021 period end, the effects of the conflict should not be reflected in the 31 December 2021 financial statements other than by making appropriate disclosures.

The exception would be in circumstances in which the effects of the conflict are so significant that an entity’s management has determined that it intends to liquidate the entity or cease trading, or that there is no realistic alternative but to do so, in which case the financial statements would not be prepared on a going concern basis (IAS 10.14), despite the fact that the triggering event occurred after period end. This is because for purposes of assessing going concern, all events after the reporting period are considered adjusting in nature.

For entities with financial reporting periods ending after 24 February 2022, the effects of the conflict to the reporting entity (if any) must be considered. Since, the event occurred before the end of such reporting periods, it should not be treated a subsequent, and hence, its impact, if material, must be reflected in the entities’ financial statements.

IAS 10.21 requires an entity to disclose information about non-adjusting events after the reporting period if they are material and non-disclosure could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements. For each material category of non-adjusting event, IAS 10.21 requires the following to be disclosed:

  • the nature of the event; and
  • an estimate of its financial effect, or a statement that such an estimate cannot be made.

The extent of disclosures will depend on the date of authorization of the financial statements (i.e. the stage of the conflict when the financial statements are finalized) and the entity’s specific circumstances. A scenario analysis or analysis of sensitivity to impacts of the event may be appropriate and a healthy reporting practice for such fast evolving events surrounded with high degree of uncertainty. 

Entities that do not have operations in Ukraine or Russia may still be affected by the conflict. These effects include, but are not limited to:

  1. Destruction, seizure and/or abandonment of both tangible and intangible property;
  2. Sanctions being placed on an entity directly, which may impede its ability to operate (e.g. access to funds, banking systems, etc.);
  3. Sanctions being placed on an entity’s customers, which may impede its ability to sell goods and services and collect debts;
  4. Sanctions being placed on an entity’s suppliers, which may impede its ability to obtain necessary raw materials, goods and services, or indirectly increase the cost of obtaining these items from alternative sources;
  5. Sanctions being placed on an entity’s lenders and/or banks, which may limit its ability to access funds and credit;
  6. Changes in customer and consumer sentiment for entities with ties to Russia, Belarus and other jurisdictions related to the Russian Federation may reduce demand for an entity’s products; 
  7. Changes in risk appetite and sentiment may lead to borrowers and investors withdrawing financial support from entities with Russian ties, resulting in increased liquidity risk and/or doubt about an entity’s ability to continue as a going concern; and
  8. Volatility in prices for financial instruments and commodities, including oil, gas, petroleum products and minerals as well as volatility in foreign currency exchange rates.

While these reporting aspects focus on entities that apply IFRS, many of the financial reporting implications noted may be applicable to entities that report under Latvian accounting framework. The financial reporting implications noted above are not exhaustive, as the conflict is evolving quickly, and other relevant considerations may be required in new circumstances.