Impact of the Ukraine Conflict on Accounting - Part I

The invasion of Ukraine by Russian troops on February 24, 2022, has had serious social consequences. It can be assumed that the global economy will suffer considerably from the consequences of the outbreak of war. In addition to strong volatility on the capital markets, the sanctions imposed by the democratic states in particular, first and foremost the G7, will have a drastic impact on the economic environment and lead to a significantly dampened economic outlook. This not only affects Russia itself, but also the countries imposing sanctions.

The local economic consequences of the Russia-Ukraine conflict are also reflected in corporate accounting. Similar to the outbreak of the Corona pandemic, the outbreak of the war is now also resulting in incalculable, short- and long-term effects on corporate reporting.

In April 2022, the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer, IDW) published a technical note on these very effects - currently in the version: Update 2 of April 14, 2022 - in which the implications of the war for accounting and auditing are addressed.

The professional advice of the IDW is here retrievable.

Effects on accounting

1. balance sheet consequences

The consequences of the war are generally a value-creating event. In this respect, the start of the war with the entry of Russian troops into Ukrainian airspace on February 24, 2022 is decisive. In this respect, the Russia-Ukraine conflict is generally not relevant with regard to accounting aspects (recognition and measurement) for reporting dates prior to February 24, 2022. In particular, there are generally no changes for the financial statements as of December 31, 2021 due to the reporting date principle. No distinction is made between HGB and IFRS financial statements.

However, the outbreak of war is relevant for the balance sheet and income statement if the continuation of the company's operations is impaired as a result (departure from the going concern principle). Only to this extent are there effects on the recognition and measurement of assets and liabilities. Accounting is then carried out in accordance with IDW RS HFA 17 - Effects of a departure from the going concern premise on the annual financial statements under commercial law.

For reporting dates after February 23, 2022, the economic consequences of the war must be taken into account in the balance sheet calculations, as in this case there are facts that will have an impact on value.

2. effects on the notes

Supplementary reporting

As was already the case for the consequences of the Corona pandemic, the war in Ukraine may also give rise to reporting obligations in the Notes. Such a reporting obligation exists, in particular, in the form of the so-called "report.Supplementary Report if a value-creating event has occurred after the balance sheet date that has a material impact on theProcess of particular importance (Section 285 No. 33 HGB for the separate financial statements and Section 314 (1) No. 25 HGB for the consolidated financial statements). AProcess of particular importance is to be assumed if - in this case - the outbreak of war affects the view of the net assets, financial position and results of operations conveyed by the financial statements and the development of the company without the supplementary report would have beensubstantially would be assessed differently. Whether this is the case depends on the circumstances of the individual case.

In the supplementary report - as part of the notes to the financial statements - both (1) the nature of the transaction and (2) the effects on the net assets, financial position and results of operations must be presented.

• Regarding the nature of the operation, a general reference to the outbreak of war in Ukraine is sufficient.

• With regard to the effects on the net assets, financial position and results of operations of the company, no quantitative disclosures are generally required; general qualitative disclosures that provide the addressees of the financial statements with sufficient information about the future development of the company, but also with regard to the financial effects of the corresponding reporting topics, are also sufficient. In this respect, from the point of view of the addressees of the financial statements, quantitative disclosures, in particular for the presentation of the effects on the financial position, can be a useful supplement. The presentation period of the financial consequences extends from the beginning of the subsequent financial year until the completion of the preparation of the annual financial statements or until the issuance of the auditor's opinion.

The above statements are largely applicable to IFRS financial statements. However, IFRS requires additional estimates of the financial effects in each case, or explanations as to why such estimates are not possible.

Small and micro-corporations are not subject to supplementary reporting requirements. For these size categories, there are at most reporting obligations with regard to risks that could endanger the company's existence (see below).

Reporting on going-concern risks

Should the war in Ukraine lead to doubts about the company's ability to continue as a going concern, companies must report on such going concern risks in the notes to the financial statements as well as in the management report - more on this below. The IDW recommends that this information be included in the supplementary report or at the beginning of the notes with reference to the supplementary report. If no notes to the financial statements are prepared (applies to micro-corporations), a disclosure is made below the balance sheet. If a management report is prepared, reference may be made in the notes to HGB financial statements to the statements in the management report.

Material uncertainties relating to the going concern premise must also be reported in IFRS financial statements.

3. effects on the management report

Risk and forecast report

In the opinion of the IDW, the war in Ukraine is reflected in the management report at least in theRisk Report low. A reporting obligation in the risk report is to be assumed if

• possible future developments lead to negative deviations from forecasts or targets of the company,

• it is a material individual risk, and

• otherwise no accurate picture of the company's risk situation is conveyed.

In addition, there are any effects on theForecast Report. In the forecast report, various estimates have to be made with regard to the future development of the company. Certain requirements are placed on the nature of the forecast. According to GAS 20, simplified forecasts may be made in times of increased uncertainty (e.g. comparative forecast). However, it is not permissible to completely dispense with forecast reporting.

In the opinion of the IDW, the war in Ukraine can, under the given circumstances, fulfill the requirements for the use of simplified forecasts. However, a general reference to the outbreak of war is not sufficient to demonstrate these requirements. Rather, specific explanations are required as to the extent to which the company's forecasting ability is impaired as a result. In general, high requirements must be placed on simplified forecasts.

Waiver of supplementary reporting in the notes to the financial statements

As discussed, there are various reporting requirements in both the notes and the management report as a result of the war in Ukraine. In view of the partially overlapping content of the reports in the notes and management report, duplication may well occur. In the opinion of the IDW, a reference in the notes to the management report (and vice versa) is permissible to the extent that identical information would have to be included in both reporting elements.

Conclusion

The war in Ukraine has severely shaken the global economy, which also has an impact on corporate reporting as the "language of business". From a purely accounting perspective, there are only consequences if the reporting date is after the outbreak of the war. In the notes to the financial statements - as already known from the Corona pandemic - the supplementary report is particularly relevant, in which the effects of the outbreak of war on the net assets, financial position and results of operations are to be presented. Finally, there are also implications for the management report, primarily in the risk report. Finally, the forecast report in the form of simplified estimates may also be affected. In view of the requirements of these reporting obligations, which are subject to interpretation and depend on the circumstances of the individual case, intensive coordination between the company and the auditor is advisable in order to take account of the increased demands on financial reporting in such times of crisis.