Impact of the Ukraine Conflict on Accounting - Part II

The Ukraine conflict continues to preoccupy the Institute of Public Auditors in Germany (IDW), the profession and a large number of accountants. InPart I The effects of the war on annual and consolidated financial statements with reporting dates up to February 23, 2022 have so far been discussed in this series of articles. It should be noted that the economic and social consequences of the war are generally not reflected in the net assets, financial position and results of operations of these companies. The event was classified as value-creating, therefore at most various reporting obligations arise in the notes and management report. The assessment of the continuation of business activities is independent of this.

However, the implications for financial statements (annual and consolidated financial statements) after February 23, 2022 - i.e. after the outbreak of war - remain open. The IDW's technical note also contains information on this (currently in the 2nd update).Part II of the series of contributions.

Implications for annual and consolidated financial statements under commercial law
Consolidation options for subsidiaries

Pursuant to Section 296 (1) No. 1 of the German Commercial Code (HGB), an option may arise as a result of the war to include Russian, Ukrainian or Belarusian subsidiaries in the consolidated financial statements by way of full consolidation. This presupposes that there are significant and continuing restrictions on the rights of the parent company with respect to the assets or management of the subsidiary. These include, in particular, restrictions for political or economic reasons. The decisive factor is that the restrictions must be material and sustainable in terms of time. Under certain circumstances, the Ukraine conflict may fulfill these two criteria cumulatively; however, a final assessment must be made on a case-by-case basis.

In addition, there is a possible (full) consolidation option pursuant to Section 296 (1) No. 2 HGB. This option exists if the information of the subsidiary concerned required for the preparation of the consolidated financial statements cannot be obtained without disproportionately high costs or unreasonable delays. In the opinion of the IDW, war-related delays in particular can lead to the fulfillment of the requirements of Section 296 (1) No. 2 HGB. This primarily concerns the so-called reporting packages of the (Ukrainian, Russian or Belarusian) subsidiaries. However, there is no such option if projections can be made with a reasonable amount of effort or if any preliminary calculations are available.

If one of the above-mentioned options is considered and exercised, the subsidiaries concerned must be included in the consolidated financial statements using the equity method or measured at amortized cost. When examining whether one of the above options applies and which alternative valuation method is to be used, it is best to consult with the auditing firm appointed.

Consequences for recognition and measurement

1. unscheduled depreciation of fixed assets

Disrupted supply chains and an expansion of the war to other regions may give rise to a probable permanent impairment, resulting in impairment losses on non-current assets. This applies in particular to property, plant and equipment (machinery, etc.) which, due to the supply bottlenecks, can no longer be used on a permanent basis or can only be used to a limited extent. However, there is also an increasing need to test capitalized goodwill and financial assets for impairment. In this context, particular attention must be paid to the deterioration in the business situation on the sales and procurement markets as a result of the war. In the case of financial assets, it should be noted that these may (optionally) also be written down if their value is not expected to be permanently impaired.

2. supplies

Interruptions to the production process and supply bottlenecks can result in significantly higher overheads. However, in the opinion of the IDW, these costs do not constitute "reasonable" (material and production) overheads and therefore cannot be capitalized as idle capacity costs.

3. receivables

If the reporting company has receivables from companies that are experiencing liquidity and payment difficulties as a result of the war, their recoverability must be reviewed. Based on this, specific valuation allowances may be required for the receivables concerned.

4. cash and cash equivalents

Under certain circumstances, companies may find themselves in a situation where some bank accounts are frozen and their access restricted as a result of sanctions currently in force. In such cases, the accounts concerned must be reported under other assets or under a separate balance sheet item. In extreme cases, where the restrictions on access are so far-reaching that there is no longer any economic allocation to the reporting entity, the "liquid" funds must be derecognized as an expense.

5. accruals

In view of possible sales difficulties and the general inflationary economic environment, there may be a threat of losses from pending transactions - given pre-fixed, fixed sales prices. Consequently, provisions for impending losses must be recognized as a result of the war in Ukraine. Furthermore, it is also necessary to take into account fines or administrative penalties that may be imposed if the company violates sanctions regulations. These can lead to provisions for liabilities.

Reporting requirements in the notes

In connection with the Ukraine war, the following disclosures in particular may become relevant:

  • Disclosure of off-balance sheet transactions / other financial obligations: The requirement is that this disclosure is necessary for the assessment of the financial position. As the war may affect the financial position, a reassessment of the requirement for this disclosure may be necessary

  • Provisions: as explained above, provisions may result (indirectly) from wartime events. In the case of a non-passivation, the reasons for the assessment as to why utilization is not predominantly probable are to be stated

  • Amount and nature of expenses of exceptional significance or magnitude


In contrast to reporting dates prior to the start of the war, the war in Ukraine also affects the balance sheet and income statement in financial statements with reporting dates after February 23, 2022. This primarily affects measurement issues due to the changed market and economic environment and the impact on subsidiaries. However, recognition requirements, particularly in the area of provisions, must also be observed. These also have an impact on the reporting requirements in the notes.