Impacts on the financial statements

Below are some considerations regarding possible impacts on the financial statements according to the Swiss Code of Obligations. Similar considerations also apply to consolidated financial statements or financial reporting according to other standards.

Cash and cash equivalents – restricted cash?

Companies with significant amounts of cash and cash equivalents in conflict areas must assess whether they may continue to freely dispose of them. If cash and cash equivalents can no longer be used for the intended purpose, this must be disclosed accordingly (Art. 959c (1) (2) CO). Even though very far-reaching restrictions don’t usually influence the recoverability of cash and cash equivalents, a reclassification to other receivables may be necessary.

Financial assets – possible impairment?

Financial assets like receivables and financial investments (e.g. Russian bonds) may only be reported at cost (Art. 960a (1) CO). Valuation allowances must be recognised for losses in value due to a deterioration in the counterparty’s credit risk as a result of the conflict (Art. 960a (2) CO).

Valuation at market price – observable market price available?

If an observable market price exists, (financial) assets may also be recognised at market value (Art. 960b (1) CO). If the market value is no longer observable as a result of the invasion, it seems appropriate to use the last available market price as the new acquisition value. In this case, the subsequent valuation is carried out at the most at the acquisition value less recognisable losses in value (Art. 960a (2) and (3) CO).

Shareholdings – loss of control or significant influence?

Various internationally active companies have decided to withdraw from Russia and/or Ukraine and Belarus. In the course of implementing these decisions, besides recoverability the question also arises with regard to the 2022 financial statements as to whether significant influence or control continues to exist over the investments concerned (Art. 960d (3) and Art. 963 (2) CO). This assessment involves a considerable margin of discretion and may, under certain circumstances, have an impact on the scope of consolidation in the consolidated financial statements. Accordingly, the notes to the financial statements should disclose how a decision to cease operations in Russia and/or Ukraine has affected the investments.

Non-financial assets – impairment?

Reporting entities must assess whether their non-financial assets, such as inventories, investments, property, plant, and equipment and intangible assets, are still recoverable as a direct or indirect result of the invasion and other geopolitical tensions.

Indicators of impairment are:

• temporary suspension of operational activity
• failure to comply with delivery/purchase contracts
• restriction of the market for supplies of goods or services
• decisions by multinational companies to leave the Russian market
• loss of profitability and property damage as a result of the invasion.

Plans to sell or abandon an operation due to the invasion could trigger an impairment of the underlying assets in the financial statements (Art. 958a (2) CO).

Provisions – impending losses?

If companies are no longer able to meet their acceptance or delivery obligations as a result of the invasion, they may be liable for damages and must assess accordingly whether this gives rise to a provision requirement (Art. 960e (2) CO).

Rouble volatility – implications for foreign currency management?

The exchange ratio between the Swiss franc and the Russian rouble has been subject to significant volatility since the beginning of the war due to sanctions and restrictions. After a sharp slump at the start of the crisis, the currency was at a seven-year high by the middle of the year. As a result of this volatility, foreign currency gains or losses may be realised and unrealised in the preparation of the financial statements. The foreign currency rates used (Art. 958d (3) CO), any measures taken (e.g. hedging and/or hedge accounting) and the impact of foreign currency effects on the financial statements must be explained in the notes (Art. 959c (1) CO).

Financing – breach of covenants?

The possible breach of covenants (loan agreement clauses) could lead to certain financing becoming subject to repayment at short notice. In extreme cases, this can jeopardise the company’s ability to continue as a going concern. If such violations exist, it’s advisable to renegotiate the contractual clauses with the counterparty at an early stage. A reclassification of an interest-bearing liability from non-current to current may be omitted from the financial statements under the CO if the lending party confirms in writing by the time the financial statements are prepared that the liability is not due within one year; Swiss Manual of Auditing (HWP), Accounting and Financial Reporting IV.2.23.4.

Ability to continue as a going concern – jeopardised or made impossible?

If there are material uncertainties that may cast significant doubt on an entity’s ability to continue as a going concern as a result of the war in Ukraine or the sanctions imposed as a result, the entity is accounted for on a going concern basis but these uncertainties should be disclosed in the notes. In such a case, the auditor is required to highlight this fact in its report in the case of an ordinary audit (ISA-CH 570.19) or add a supplement in the case of a limited audit (Swiss Standard on the Limited Statutory Examination (SER) 2015, page 119).

If it appears that a going concern no longer exists or is no longer intended, the financial statements must be prepared on the basis of disposal values, the deviation from the going concern assumption must be recorded in the notes and the impact on the economic situation must be presented (Art. 958a (2) and (3) CO).

Additional expenses and income – extraordinary items?

The Swiss Code of Obligations provides for the separate disclosure of extraordinary, non-recurring or out-of-period expenses or income with corresponding explanations in the notes to the financial statements (Art. 959b (2) (9) and Art. 959b (3) (6) as well as Art. 959c (2) (12) CO). Fundamentally, the question arises as to whether the war in Ukraine qualifies as an extraordinary event and its financial impact should therefore be presented in the financial statements as extraordinary items. In accordance with Swiss GAAP FER 3/22, expenses and income are extraordinary if they were not foreseeable and occur extremely rarely in the ordinary course of business. On a global scale, unfortunately wars are not likely to be considered exceptional events. But as a rule, such an event will occur extremely rarely for a company in Switzerland and can therefore be classified as extraordinary. Extraordinary income is to be treated in the same way as extraordinary expenses.

Notes disclosures – additional disclosures?

Art 959c (1) (2) CO requires ‘information, breakdowns and explanations relating to items on the balance sheet and in the profit and loss account’. If the crisis has a material impact on individual items on the balance sheet or profit and loss account, these should be adequately disclosed in the notes to the financial statements in the form of a breakdown showing the effect of the crisis separately and an explanation describing the impacts. In particular, extraordinary items must be explained in the notes.

Sanctions

Various institutions and states, including Switzerland, have imposed sanctions on Russia and Belarus in connection with the invasion of Ukraine. The different sanctions can be roughly summarised as goods measures, financial measures and other measures. Goods measures are export and import bans on specifically defined goods or goods originating from a certain area. Financial measures include asset freezes and prohibitions on carrying out financial transactions, such as granting loans or taking deposits above a certain threshold. If the company operates internationally, not only the sanctions imposed by Switzerland must be taken into account but also the sanctions imposed by other states and institutions. The measures may be imposed on natural persons or companies.

Sanctions – impacts on the financial statements?

The company should make sure that no transactions are carried out in sanctioned areas or with sanctioned people or companies in order to avoid negative legal consequences. In many cases, the interpretation of the sanction rules isn’t clear and requires further clarification with the competent authority, such as the State Secretariat for Economic Affairs (SECO). Transactions with companies and people who are not sanctioned but who have close ties to Russia or Belarus may also give rise to reputational risks. As the sanctions imposed are continuously being adjusted, the company should make sure that the assessment is always carried out on the basis of the current applicable sanctions and is repeated at regular intervals.

Sanctions – impacts on the financial statements?

From the auditor’s perspective, it is also necessary to assess whether the company to be audited or its (beneficial) owner is subject to sanctions and whether it is still permissible to provide services to this company. According to Article 28e (1) of the Ordinance on Measures Connected with the Situation in Ukraine, the direct and indirect provision of services in the areas of auditing, including auditing of financial statements, accounting and tax consulting, as well as business and public relations consulting to sanctioned companies and individuals, are prohibited. In addition to this, an auditing company also has its procedures for accepting orders. For mandates which are already in progress, it must be clarified whether they are to be discontinued immediately or whether the existing contractual or legal obligations take precedence. 

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