Reporting the effects of war, or: Evil as usual…

Like the pandemic before it, the Russian invasion of Ukraine triggers the expected number of guidance pieces on accounting and reporting implications…

These include possible impairment of various long-lived assets and financial instruments, impacts on lease and other contracts, expanded disclosure about risks and uncertainties and significant estimates and judgments, and so on. Among these is whether the invasion and its consequences should be considered “unusual” (of course, one might debate that question and its implications from numerous perspectives, but today we’re just considering the accounting one).

Deloitte, in a US context, recently issued the following commentary:

  • …if an entity concludes that a material event is of an unusual nature or occurs infrequently (or both), the entity must either report the nature and financial effects of the event as a separate component of income from continuing operations or provide disclosure in the financial statement footnotes. Under this guidance, “unusual nature” represents a situation in which the underlying event has a high degree of abnormality and is not related to the ordinary activities of the entity. Furthermore, “infrequency of occurrence” represents an event that would not reasonably be expected to recur in the foreseeable future. Many entities may consider the Russia-Ukraine war to be unusual or infrequent (or both); however, an entity must use judgment and take into account its specific circumstances to determine whether events stemming from the war would be considered unusual or infrequent. For example, if an entity operates in an industry that has experienced sanctions in the past, additional sanctions may not be considered infrequent or unusual.
  • In addition, entities would consider whether to separately disclose related amounts on the basis of the materiality of their impact on the financial statements…We believe that in determining how to report such amounts, an entity could reasonably conclude that disclosing direct and incremental costs or benefits related to the war would be consistent with the spirit of (the) guidance (e.g., asset impairments, costs of exiting a country, or business interruption insurance recoveries). However, as the war evolves, an entity’s manner of conducting business may change. Accordingly, it may become more difficult to objectively distinguish unusual costs from those that are the new normal.

IFRS contains a requirement to include additional line items in the income statement when necessary to explain the elements of financial performance; conversely though, regulators and others take issue with line items that might try (say) to cast certain items as being “unusual” when they should more likely be viewed as part of normal operations. The 2019 exposure draft on general presentation and disclosure proposed a definition of unusual income and expenses as: “are income and expenses with limited predictive value. Income and expenses have limited predictive value when it is reasonable to expect that income or expenses that are similar in type and amount will not arise for several future annual reporting periods.” It proposed among other things that entities disclose the amount of each item of unusual income or expense recognised in the reporting period; the line item in which they’re included; and a narrative description of the transactions or other events that gave rise to that item and why income or expenses that are similar in type and amount are not expected to arise for several future annual financial reporting periods;

This leads to the following LinkedIn commentary by Ivan Chaliy:

  • Is war an unusual event? Without a doubt!
    How to present losses caused by war?
  • I think it would be wise to use the guidelines of the ED/2019/7…
  • Ukrainians are confident in the justice of their struggle, and therefore they will defeat Evil. Then war will not arise for several future annual reporting periods….
  • Аnd what will be shown in the reports of Russian companies?
    Are #sanctions losses unusual for Russian companies? NO!!! This is the new normal for Russia. It’s time for them to start getting used to this situation. Stench and decay is their fate for the coming years.

Is war an unusual event? Well, I suppose that depends on your temporal and geographical frame of reference (it wouldn’t likely be so in the consolidated accounts of the whole planet). But leaving that aside, and acknowledging that the commentary carries an ideological as well as an analytical purpose, I find the second half of it to be more immediately unarguable: that (if the exposure draft proposals were being applied now) Russian companies, or those heavily invested in Russia, hardly have a case for stating that their current woes have “limited predictive value” – on the contrary, as Chaliy says, their current disrepair provides the best available guide to their future. The Ukrainian side of the equation, tragically, is a bit more ambiguous – unfortunately the justice of their struggle doesn’t provide a sure guide to the speed with which Evil might be defeated, or with which normality might then return. The financial reporting issues arising (how objectively the impacts of the war can be determined; whether those are best presented in the income statement or the notes) aren’t dissimilar to those that we covered here in the context of the pandemic. The moral issues arising, of course, are quite a different thing altogether…

The opinions expressed are solely those of the author

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