The war’s impact on financial reporting: an expert’s view

The conflict in Ukraine is having an impact on a wide range of reporting issues, from material judgments and estimates to a variety of accounting and disclosure considerations (Emir Memedovsky/Getty Images)

The war in Ukraine is having a significant impact on certain accounting and financial-reporting matters as many companies complete their quarterly reporting. Deloitte Canada recently released an IFRS In Focus report, Financial Reporting Considerations Related to the Russia-Ukraine War, that outlines details on a wide range of reporting issues, from material judgments and estimates to a variety of accounting and disclosure considerations.

CPA Canada spoke to Matt Welchinski, CPA, partner at Deloitte Canada, on the impact of the conflict on financial reporting and what CPAs need to consider moving forward.

CPA CANADA: How does this crisis compare to a major recession or natural disaster in terms of financial reporting/risk assessment?
Matt Welchinski (MW): Some things are the same, some are different. Natural disasters tend to drive commodity spikes as well. Both often lead to humanitarian issues. Uncertainty typically reaches a defined crest whereas this crisis appears to be evolving quickly.

The war, much like the pandemic, has created a number of uncertainties, causing volatility in commodity prices and impacts on the global supply chain. Escalation is a real risk here given the volatility of the situation. Also, Russia is a significant supplier/producer of a number of commodities. This crisis is changing conversations around valuations, liquidity, securing financing, complying with sanctions and revenue recognition, among many other reporting considerations.

CPA CANADA: What reporting areas will be most affected by the conflict in Ukraine?
MW: Financial statement elements that could have implications include the need for and significance of material judgments and estimates, forecasting, classification of profit or loss as continuing versus discontinued operations, impairment, and disposal of non-financial assets, among others. There are also possible growing considerations if you have operations in or material exposure to Belarus, Russia or Ukraine.

Impairment and recoverability are specific areas that will be particularly complex, since projections and key inputs will likely keep changing as the situation evolves. Scenario modelling may be necessary in certain instances. Whether you are a financial professional, business executive or planner, it will be critical to follow developments very closely for some time.

CPA CANADA: How will sanctions be handled from a reporting standpoint?
MW: Sanctions are creating significant additional compliance considerations, as sanctions tend to vary by specific country/jurisdiction. Banks would typically have the most extensive infrastructure to deal with sanctions given existing programs around corruption and facilitation payments. Certain businesses might not be as used to keeping track of multiple regulatory sanctions and may need to invest in technology and/or outside advice if they haven’t already done so.

CPA CANADA: What organizations will be the most affected?
MW: Some financial institutions that have major exposure to the regions in question may be directly impacted as they may have loans or other instruments that are not recoverable. The magnitude of exposure will depend on concentration of exposure to these regions and the exposure (positive or negative) to supply chain and commodity price disruption. Many commodity producers—e.g., nickel, wheat, barley, palladium—may actually experience a significant rise in revenues and profits, since these prices are rising.

Deloitte Canada partner Matt Welchinski (Image provided)

CPA CANADA: Which accounts will be subject to higher degrees of estimation and judgments?
MW: Recoverable amounts of assets will likely be the account balances that have the highest degree of estimation uncertainty and certain judgments may be required around scenario planning, going concern considerations and nature and extent of disclosures. Determining fair value of certain assets or liabilities may not be black and white. In some cases, fair value determination may require complex models which will likely result in additional disclosures.

CPA CANADA: How will the risks and uncertainties related to the war be factored into impairment assessments?
MW: The recoverable amounts of operations, inventories, and certain other assets may change considerably as the situation evolves. The determination of recoverable amount, often determined as fair value, may create significant estimation uncertainty, which may require multiple scenarios. We can also expect that discount rates will likely go up as risk and uncertainty increase.

CPA CANADA: How will withdrawal of operations from Russia affect reporting?
MW: If you have made an active choice to no longer operate or withdraw, there could be significant impairment considerations and determination of whether these operations constitute discontinued operations. Assets may become stranded, which may introduce significant valuation pressures and may impact going concern considerations.

CPA CANADA: What should accountants be doing now to prepare for the months to come?
MW: There are two broad immediate considerations apart from financial reporting. First, controllers, CFOs or your compliance function need to make sure they keep the lights on in their business and don’t breach any new or revised law or regulation driven by sanctions. The list of sanctions in Canada is potentially complex so you should consider working with internal or external counsel to get it right and ensure accuracy.

The second depends on your financing arrangement or counterparties. If you are dealing with a Russian bank, or a counterparty that is a Ukrainian company incapable of operating at the moment, liquidity concerns could cause a significant blow to your business in the short term if not appropriately managed. Before you even get to financial reporting these are some really important finance and business-related items that you need to get in front of. You will need to follow developments closely to evaluate the impact on your business as the situation evolves.

LEARN MORE

Access CPA Canada’s resources on international financial reporting standards, accounting standards for private enterprises and MD&A and other financial reporting.

And find out about other ways that current global crises are affecting CPAs, as well as the effects of the war on the economy.