Accounting implications of Russia’s invasion of Ukraine

Russia’s invasion of Ukraine and the imposition of international sanctions have far-reaching economic implications, not only for companies in Russia and Ukraine, but also globally, where businesses engage in economic activities that could be affected by recent developments.

The potential impact of these events on financial statements includes both the recognition and measurement of assets and liabilities as well as the presentation, disclosure, and possibly even the ability of an entity to continue as a going concern.

For financial statements ending 31 March 2022 or later, careful consideration of the resulting accounting implications is required for entities affected by these developments and the sanctions imposed. This article addresses some of these areas; a more comprehensive analysis is provided in the in-depth paper on the Accounting implications of the Russian invasion of Ukraine.

Russia’s access to foreign currency reserves and SWIFT is restricted

Due to the sanctions, Russia's access to foreign exchange reserves is restricted, and certain Russian banks have limited access to the SWIFT system. The restrictions on SWIFT mean that alternative payment mechanisms must be used to transfer funds within the banking system. This could limit the ability of customers to pay loans, settle claims, or receive funds, thus affecting the timing of payments and/or receipts. This, in turn, could affect the valuation of (financial and non-financial) assets and it must be examined if a breach of contract has occurred because payment is not made at the contractually agreed time.

Financial assets – potential impairment

When accounting for an existing financial instrument, there is a wide range of possible impacts that could arise, depending on individual facts and circumstances.

Financial assets such as loans, receivables, and Russian bonds, may be impaired and subject to changes to fair value measurement and hierarchy. If an entity has financial instruments that are within the scope of IFRS 9’s expected credit loss (ECL) model, management should consider the impact of the invasion on the ECL.

Non-financial assets – potential impairment

Reporting entities will need to assess if a non-financial asset or cash generating unit (CGU) is impaired as a direct or indirect result of the invasion and other geopolitical tensions. Assets potentially affected include fixed assets, right-of-use assets, goodwill, and intangibles assets.

IAS 36 requires goodwill and indefinite-life intangible assets to be tested for impairment at a minimum every year, and other non-financial assets whenever there is an indicator that those assets might be impaired. The following events might indicate impairment:

• temporarily ceasing operations,
• breaches of supply/purchase contracts,
• limitation of market for product delivery,
• decisions by multinational companies to leave the Russian market, and
• decline in profitability and physical damage as a result of the invasion.

Plans to dispose of or abandon an operation because of the invasion could trigger an impairment of the underlying assets in the consolidated financial statement.

Non-financial assets – potential loss of control

Restrictions have been imposed by governments on Russia and by the Russian government. Furthermore, many global companies have decided to withdraw from operations in Russia and/or Ukraine. As a result of these decisions, entities need to consider whether they have lost control over their subsidiaries in the affected regions. Concluding on whether these restrictions result in an entity losing control or not might be an area of significant judgement.

Non-financial obligations – onerous contracts

In the wake of the invasion, companies need to assess breaches of supply contracts to determine if an obligation exists. Onerous contracts are contracts where the unavoidable costs of meeting the contractual obligations exceed the expected economic benefits. Unavoidable costs under a contract are the least net cost of exiting the contract (that is, the lower of the cost to exit or breach the contract and the cost of fulfilling it). Such contracts might include, for example, supply contracts that the entity is able to fulfil only at a loss because of the invasion. Management should check if any of its contracts have become onerous.

Effects of foreign exchange rates

The introduction of sanctions and restrictions on Russia has resulted in significant volatility in the exchange rates for the Rouble – which, in turn, has an impact on the exchange rates used to translate income statement amounts. The foreign exchange exposure and translation of foreign currency transactions need to be reassessed.

Presentation and disclosure – breach of covenants

As a consequence of the invasion, companies may need to re-evaluate their financing arrangements. 

They may experience significant liquidity issues, changes in debt/equity ratios, and changes in other financial metrics. This might call into question whether the company complies with its debt covenants. The potential breach of covenant could result in loan repayment terms changing and some loans becoming repayable on demand. Companies should examine if the classification of loans and other financing liabilities between non-current and current is affected and, in extreme situations, if the entity remains a going concern.

Ability to continue as a going concern

Management should consider the potential implications of the Russian invasion of Ukraine and the measures taken in response to it when assessing the entity’s ability to continue as a going concern. An entity is no longer a going concern if management intends either to liquidate the entity or to cease trading, or if it has no realistic alternative but to do so. Material uncertainties that might cast significant doubt on an entity’s ability to continue as a going concern should be disclosed in accordance with IAS 1.

For further insights and guidance, see our in-depth article on the Accounting implications of the Russian invasion of Ukraine.

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