Effects of the War in Ukraine on Accounting and Reporting

The invasion of the Russian armed forces in the Ukraine on 24 February 2022 is having – as far as predictable at all – substantial short-term and long-term consequences on all areas of the economy. In December 2022, the Institute of Public Auditors in Germany (IDW) published a fourth update on the potential effects of the Ukraine war on the accounting of current financial statements.

One main starting point for considering the conflict in accounting, as well as for reporting in notes to the financial statements and management reports, is the assessment of the invasion of 24 February 2022 as a non-adjusting event for periods ending before that date. The effects typically will be recognized in the accounts and measurement of events for annual and consolidated financial statements as at 31 December 2022. 

The contents and scope of the reporting clearly depends on the specific foreseeable consequences for the net assets, financial position and results of operations in the annual and consolidated financial statements.

Furthermore, many companies are confronted with the major challenge of making assessments or evaluations in their notes to the financial statements and management reports of events that will potentially only occur in the next weeks and months. Depending on the sector or business model, direct effects arise partly from changes in prices, interruptions ofthe supply chain or the loss of potential markets. If, due to this uncertainty, the companies’ management has doubts about the entity’s  ability to continue as a going concern, they must detail this out in their reporting.

To the extent that companies have to prepare a management report or a group management report, other obligatoins to provide information as part of risk and forecast reporting may arise from the increased uncertainty caused by the economic circumstances. Should the company be so affected by the unusually high level of uncertainty due to the macroeconomic environment caused by the Ukraine conflict that it is not possible to forecast the main financial and non-financial key performance indicators, as is ordinarily required, comparative forecasts or the presentation of various scenarios may be sufficient.

When uncertainties exist, IFRS accountants have to report in the notes to the financial statements, on the key assumptions they have made with respect to accounting and reporting concerning the potential consequences of the current crisis to the company in question, even including risks to continued existence. It must allow the readers to be able to follow the considerations and assessments of management, so that they can form their own picture of the company’s position.

This should include making disclosures on estimation uncertainties, such as when sensibility analyses are required (cf. IAS 1.125f.). If significant effects caused by changes in estimates occurred in the current reporting period, this must be reported (cf. IAS 8.39 and IAS 34.16A(d)).

In financial statements under German GAAP, disclosures in this regard that present a true and fair view of the company’s net assets, financial position and results of operations are appropriate.

Subsequent events in the notes to the financial statements

Events of particular significance which occurred after the end of the financial year but before the financial statements were prepared, and which are not reported in the income statement or in the balance sheet, are to be disclosed in the notes to the financial statements prepared under German GAAP in line with section 285 no.33 of the German Commercial Code (HGB).

In this report on subsequent events, the nature and financial effect of these events are to be disclosed. An event is generally deemed to be of particular significance if its effects are capable of having an influence on the picture which the financial statements as at the balance sheet date present and if the users would evaluate developments after the reporting period significantly differently if there were no report of subsequent events.

Under IFRS, if a ‘non-adjusting event’ is material, the nature of the event must be reported (IAS 10.21(a)). In addition, under IAS 10.21(b) an estimate of its financial effect or the fact that an estimate cannot be made is to be disclosed in the notes to the financial statements.

Risk report in the management report

The assessment of risks is to be performed as of the reporting date, but if the importance of risks changes after the end of the reporting period (up to the end of preparation of the management report), or if new risks emerge or existing risks no longer apply, the modified assessment of risks additionally is to be presented if this is necessary to convey a suitable understanding of the company’s risk position (GAS 20.155).

Report on expected developments in the management report

The conditions laid down by GAS 20.133 on the exception of reduced requirements for the exactness of forecasts concerning the development of the most important financial and non-financial key performance indicators by the end of the forecast period (forward-looking period) (i.e., an unusually high level of uncertainty concerning future prospects because of the macroeconomic environment and the concurrent material impairment of the entity’s ability to make forecasts) may at present be considered as met, yet because individual entities are affected in different ways. It is always necessary to evaluate the circumstances after the management report has been prepared on a case-by-case basis. If all the conditions are met, instead of making point, interval or qualified comparative forecasts, the entity is allowed just to make comparative forecasts in its management report or to present the expected development of key performance indicators in various scenarios, together with the relevant assumptions applied. In the light of the currently high levels of uncertainty, it is not allowed not to include any forecasts in the management report at all.