What the Russia-Ukraine Conflict Means for Global Accounting

The recent conflict arising from the Russian government’s invasion of Ukraine has impacted countless people – both in the affected countries and around the globe. Many countries are now evaluating the uncertain future impact on their own governments and economies as they support Ukraine in its time of need. In this article, we focus on a few key areas of potential impact for most businesses, specifically as it relates to their accounting and financial reporting, and share an easy way you can support Ukraine through this crisis.

The human population can’t seem to catch a break. As soon as we start to emerge from a two-year long pandemic, a global conflict arrives onto the scene. In February 2022, the Russian government invaded the neighboring country of Ukraine in full force, attacking its population and destroying its cities. As of today, the conflict and devastation continues, with no immediate signs of peace.

The impact of this conflict reaches far beyond Russia, Ukraine, and the geographical region; many countries and businesses across the globe are feeling its effects as well as they try to support Ukraine (or for a few countries, Russia). A few noteworthy examples include:

• Sanctions by the U.S. and other governments on Russia, including a ban on the import of Russian oil (check the latest prices at your nearest gas station and try not to weep);

• Multinational companies discontinuing or abandoning their operations within  Russia. This includes most of the largest international accounting firms, who have separated from their Russian member firms;

• The decision by the global SWIFT banking system, which governs the effective international transfer of funds, to ban most large Russian banks from its network resulting is a severely reduced ability for Russian individuals and businesses to make payments outside of their country.

As you may have expected, the many events stemming from the conflict may also have a significant impact on the accounting and financial reporting for businesses in multiple critical areas. Below are a few key areas to be aware of as you assess the impact on your own company’s accounting.

Deconsolidation of foreign entities

Many multinational companies have made the decision to part ways with their Russian subsidiaries and/or operations by ramping down their interaction or separating entirely. As this happens, the Russian government is toying with the idea of nationalization for these abandoned operations, i.e., taking over control itself. For countries currently considering these plans, such activities may result in accounting for a deconsolidation of a subsidiary once the parent entity is determined to no longer hold control over the subsidiary. Even if not yet performed, it could require the need to present the operations of the Russian subsidiary as discontinued operations under ASC 205-20, or as a group of assets held for sale under ASC 360.

Impairment of long-lived assets

Even if a company  decides not to sell or abandon its Russian or Ukrainian operations, the unusual and government factors of the factor may indicate a “triggering event” that would require an evaluation of whether certain assets of the Company related to those operations might be impaired. This could include:

• Impairment of goodwill from acquired businesses/subsidiaries that are based in or with interaction with Russia and Ukraine;

• Impairment of long-lived assets, such as buildings, leasehold improvements, and other equipment within Russia or Ukraine locations that have been abandoned or destroyed;

• Impairment of right-of-use assets under ASC 842, for a company’s real estate or other leases located in the affected area.

Revenue recognition and receivables

For companies who conduct their business with customers in Ukraine or Russia, revenue recognition may not be impacted for goods or services provided before the conflict began. However, events occurring after the conflict’s start may not allow businesses to continue their goods or services with these customers. It may also require a company to reassess the required criteria to qualify as a contract under Step 1 of ASC 606, specifically whether it believes it is probable that it will obtain substantially all of its consideration to which it is entitled for its goods or services provided. If that is no longer the case, then a contract no longer exists and revenue cannot be recognized until very specific criteria are met.

Even for customers where all revenue has been recognized, it may be the case where their receivables may be impacted. Actions such as the ban of Russian banks from the SWIFT banking system may severely limit a Russian customer’s ability to pay what is due, among many other factors. Companies should evaluate their allowance for doubtful accounts to determine if additional reserves or write-offs are needed based on recent circumstances.

Subsequent events and disclosures

For those who think that they do not need to focus on these items for their 2021 financial statements, think again. Events subsequent to fiscal year-end that could have a material impact on the Company’s financial statements must also be identified and either accounted for (as a recognized subsequent event) or at least disclosed (as a non-recognized subsequent event). If a company has significant business or operations related to Russia or Ukraine, it may be required to include a financial statement disclosure to make its readers aware of potential future impacts from the conflict, and either an evaluation of estimated impact or mention of uncertainty around such an evaluation.

The conflict between the Russian government and Ukraine reaches across all industries, including accounting.  Make yourself aware of potential accounting complications or issues, and consult an accounting expert if it is unclear what is required.

Lastly, while we at Zeroed-In do not have any direct family or friends living in the affected area of Ukraine, we stand with the people of Ukraine and are saddened by the events that have happened. For anyone reading this who is unsure how to support Ukraine during this time, please refer to the following ways that you can assist through donation:

• Donate to the Red Cross of Ukraine to help provide vital aid to people during this difficult time. All funds will be used to help those in need, affected by armed conflict, blood collection, mobilization of volunteers and resources, and emergency activities.

• Donate to the Kyiv School of Economics to provide food supplies, transportation, refugees help for Ukrainian citizens affected by the war and purchase necessary medicines, first aid and protective kits for the State Emergency Service of Ukraine, Ukrainian Paramedic Association, and the Ukrainian Territorial Defense Forces.

• Donate to USA for United Nations High Commissioner for Refugees to provide emergency supplies, lifesaving care and protection the moment families in Ukraine are forced to flee for their lives. You will help children, women and men displaced by violence in Ukraine know they are not alone at the most devastating moment of their lives.