This past year has been more chaotic than most for companies, especially those with overseas operations in Ukraine or Russia. The following are some of the accounting matters companies need to be considering as they look back at 2022.
Abandoned/Nationalized/Sold Assets in Ukraine or Russia
The Russian parliament has continued to advance legislation that would allow the government to nationalize assets of foreign companies that left Russia. Companies will need to consider how they are monitoring these events for disclosure, as well as for potential accounting implications if they lose control over a joint venture, subsidiary, or other stand-alone asset and have to deconsolidate or otherwise revise their accounting for those items. There are also heightened impairment risks for companies that require significant judgment to be made, as any impairment losses taken under U.S. GAAP would not be reversible if later conditions turned out to be more favorable. For assets temporarily abandoned, or operations temporarily halted that are not part of a previous plan, the company will need to consider whether its depreciation estimate of the asset is appropriate or requires adjustment, as well as whether an impairment of a held-for-use asset has occurred. A similar evaluation should occur if the company has decided to abandon the asset (i.e., disposed of other than by sale); the appropriate disclosures will also need to be considered. In addition, companies should consider whether they have any asset retirement obligations (ARO) that need to be revised as a result of changes in the timing to settle the obligation. Finally, if a company has sold assets in Russia or Ukraine, the held-for-sale guidance must be considered to ensure the requirements have been met for classification on the balance sheet as held-for-sale and determine whether the discontinued operations accounting treatment is met.
Impairment Testing for Goodwill
Companies with goodwill or indefinite-lived assets in Ukraine or Russia will need to assess whether their particular events and circumstances require an impairment test prior to their annual test. Supply chain disruptions, rising interest rates, increasing inflation, and restrictions on the ability to access capital should be considered in determining whether an interim impairment test is needed.
Companies whose inventory may be slow moving as a result of sanctions or other impediments resulting from the situation in Ukraine or Russia should assess whether their carrying value of inventory is appropriate. For these companies, it may be necessary to book a larger reserve for obsolete or slow-moving inventory in an interim period. In addition, companies will need to exercise significant judgment to evaluate their accounting for fixed overhead cost allocations if demand for the products or production volumes become abnormally low during the year.
Companies who are looking at moving their people out of harm’s way or providing additional benefits for their people in Ukraine or Russia (e.g., salary continuation, involuntary termination benefits, voluntary and involuntary furloughs) should examine the costs associated with these actions. Because there are multiple accounting frameworks for employee benefits, management will need to consider the appropriate accounting framework for each situation.
Companies who utilize the SWIFT system (Society for Worldwide Interbank Financial Telecommunication) may face disruptions and higher costs for moving money into or out of Russia via the SWIFT system. This may impact their ability to both receive payments from customers and creditors, as well as their ability to make payments to employees, vendors, investors, and others.
Contract Modifications or Terminations
Companies may modify or terminate numerous sales, debt, or other contracts under these circumstances. Sales contracts may be modified to amend the scope and pricing of the arrangement, or may be terminated entirely. In addition, companies may no longer have the same expectations regarding collectability, as evidenced by either extending payment terms or even reducing the payments they are willing to accept. A company will need to exercise judgment to consider the appropriate accounting under ASC 606 and ASC 326. For companies that amend debt instruments, management will need to consider the guidance for troubled debt restructurings, debt modifications, and debt extinguishments to determine the appropriate accounting.
Highly Inflationary Economies
The Center for Audit Quality’s (CAQ) latest list of highly inflationary economies does not include either Russia or Ukraine; however, companies should have processes in place for monitoring whether highly inflationary accounting under ASC 830 is applicable. Part of that process needs to include how comfortable a company is with the inflation data being used to calculate the cumulative inflation rate.
Risks and Disclosures Around Future Losses
Companies may anticipate losses that are foreseeable but not actually incurred in the current reporting period. Increased costs due to supply chain issues, increased prices for inputs, and other similar factors may all be directly or indirectly related to the war in Ukraine. Although future operating losses are not recognizable liabilities, and companies need to wait until the losses are incurred, companies should be considering what risks and other disclosures must be made. One final consideration is that companies with IFRS exposure will need to assess whether the increase in interest rates are an impairment indicator. Under IFRS, if an increase in interest rates has affected the discount rate used to determine the recoverable value of the company’s asset by a material amount, the company may need to recognize an impairment loss.