ESMA highlights key issues for 2022 interim reporting raised by Russia’s invasion of Ukraine

Keywords: Mazars, Thailand, IFRS, ESMA, Russia, Ukraine, IAS 34, IFRS 7, IFRS 5, IAS 12, IAS 21, IAS 37

22 July 2022

These recommendations may also be relevant to annual financial statements, for entities whose reporting period does not coincide with the calendar year.

The importance of 2022 interim financial reporting in an uncertain and rapidly-changing environment

ESMA emphasises the need for financial reporting that is as transparent as possible regarding the impacts of Russia’s invasion of Ukraine, whether direct or indirect (e.g. the increase in the price of some commodities), as well as the impacts of sanctions imposed on Russia and Belarus.

ESMA recommends that issuers provide specific and detailed disclosures, tailored to their particular situation. Disclosures must help users to understand the current and, where possible, expected significant impacts of the conflict on an issuer’s financial position, performance and cash flows.

ESMA recommends that issuers with significant exposure to the impacts of the conflict and the associated sanctions should generally present all the necessary disclosures in a single note to the financial statements, or provide a key to all the different notes that relate to Russia’s invasion of Ukraine.

ESMA also emphasises the need to provide information on the identification of the principal risks and uncertainties to which issuers are exposed, whether directly or indirectly.

If an issuer has significant risk exposure, but the invasion has not actually had a material impact on its financial statements, ESMA recommends that the issuer should explain why this is the case.

Furthermore, ESMA emphasises that it is important to keep the market informed as soon as possible on any relevant material information relating to the conflict that affects an entity’s fundamentals, prospects or financial situation.

The European market regulator also highlights the essential role played by audit committees in particular in ensuring that interim financial reporting is of high quality.

Additional information should be presented in interim financial statements and management reports

ESMA makes a general call for consistency between disclosures in the interim financial statements and in the interim management report.

Additional information to be presented in interim financial statements

ESMA reminds issuers that under IAS 34, the level of information provided should be proportionate to the objective of providing an update on the latest complete set of annual financial statements published. As the conflict has been in progress since 24 February 2022, it constitutes a significant event for the first semester, and ESMA thus expects that a substantial update will be required for entities with significant operations in Russia, Ukraine and/or Belarus, or that have significant exposures to indirect impacts of the conflict.

ESMA also notes that, in addition to the disclosures required by IAS 34 for condensed interim financial statements, entities may need to provide additional information that is normally only required under IFRSs in a complete set of annual financial statements, in order to provide relevant information on the impacts of the war in Ukraine in the 2022 interim financial statements. ESMA gives as an example the disclosures on financial risks required by IFRS 7 (credit, liquidity, currency and commodity risks) and the associated sensitivity analyses.

As a result of the uncertainty resulting from the war in Ukraine, many entities will need to make use of significant judgements and assumptions when preparing their 2022 interim financial statements. They will need to update the assessments carried out at 31 December 2021 on significant judgements, assumptions about the future and other major sources of uncertainty. The interim financial statements should include disclosures on the nature and amount of these changes.

Additional information to be presented in the interim management report

As regards the disclosures to be presented in the half-yearly management report, ESMA also recommends that issuers should provide detailed, entity-specific information. This should include disclosures on the following:

• a commentary on the direct and indirect impacts of the war in Ukraine and the associated sanctions on the entity’s strategic orientation and targets, financial position and performance, and cash flows;
• details of measures taken to mitigate the effects of the crisis (particularly any specific support measures that it has applied for/received, and its risk hedging strategy);

ESMA also reminds issuers to update their disclosures on related party transactions with companies and/or individuals subject to sanctions, when relevant. This also applies to the interim financial statements.

How to approach key issues in the context of Russia’s invasion of Ukraine

Ability to continue as a going concern

In the current context, ESMA points out that the going concern assumption shall be assessed at group level (even if there are doubts about a subsidiary). An issuer shall take account of all available information, including any restrictions on the group’s ability to readily access cash and cash equivalents (which should be disclosed if relevant).

Impairment testing of non-financial assets

The decisions taken by some companies to abandon, sell, suspend or cancel operations or investments in Ukraine, Russia and Belarus are, a priori, indicators of impairment under IAS 36. Thus, ESMA notes that such decisions must be taken into account when assessing whether an entity needs to recognise impairment.

It also acknowledges that impairment testing is particularly tricky in the current context, and the assessment of cash flow projections may involve consideration of multiple scenarios. ESMA emphasises that, in such a case, the weighting of these various scenarios should be calibrated on the basis of reasonable, supportable and realistic estimates and assumptions, to avoid the risk of excessively optimistic or pessimistic biases.

In addition, discount rates may need to be updated to reflect increases in interest  and inflation rates, unless future cash flows have already been updated to reflect these changes.

Finally, disclosures on impairment testing should also include updated information on sensitivity analyses, which may require an expanded range of reasonably possible changes in key assumptions.

Assessment of control, joint control or significant influence

Given the change in facts and circumstances resulting from Russia’s invasion of Ukraine and the associated sanctions, some issuers may need to reassess whether they still have control, joint control or significant influence over their subsidiary, joint arrangement or associate. This assessment should be carried out with care on a case-by-case basis, to assess whether the changes in facts and circumstances may call into question the previous assessment. However, ESMA notes that the decision to abandon operations in Ukraine, Russia or Belarus, or restrictions on access to information or on the use of financial resources, may not necessarily lead to the loss of control, joint control or significant influence.

Implementation of IFRS 5

ESMA reminds issuers that non-current assets (or disposal groups held for sale) may only be classified as held for sale under IFRS 5 if they are available for sale immediately, in their present condition, and the sale is highly probable. It should also be noted that the standard requires a specific accounting treatment for operations that are to be abandoned or terminated (no impact on the balance sheet, but recognised in profit or loss and the cash flow statement, provided that the operation in question represents a separate major line of business or geographical area of operations).

Other disclosure requirements

Entities must also consider whether other disclosures are relevant in light of the identified impacts of the conflict. These might include the recognition of deferred tax assets in accordance with IAS 12, remeasurement of foreign currency transactions or translation of foreign currency financial statements in accordance with IAS 21, and the measurement of provisions (including provisions for onerous contracts) in accordance with IAS 37.