In connection with the war situation in Ukraine, here are a number of issues to be taken into account in the preparation of the annual financial statements and management report (individual and consolidated) for the 2021 financial year:
In the first place, it is necessary to analyze in each work whether this situation may have sufficient relevance to be considered as an event subsequent to year-end, to be reported in the annual accounts. The consideration or not will depend on, among other factors, the situation of the conflict at each moment and its repercussions, the sector of activity of the company and the specific circumstances of each Company/Entity.
If, after the above analysis, it is concluded that we are dealing with a subsequent event that has an impact on our client's financial statements, such subsequent event will in any case be type 2 of those considered in the PGC, i.e., it would be a subsequent event that requires information in the notes to the financial statements, but not an adjustment of the figures in the annual accounts, since these are not events existing at the end of the fiscal year.
In this regard, it should be recalled that PGC Rule 23 differentiates between two types of subsequent events:
Subsequent events that bring to light conditions that already existed at year-end should be taken into account in the preparation of the financial statements.The subsequent events must be taken into account in the formulation of the annual accounts. Depending on their nature, these subsequent events shall give rise in the annual accounts to an adjustment, to information in the notes to the financial statements, or to both. Events subsequent to year-end that reveal conditions that did not exist at year-end shall not give rise to an adjustment to the annual accounts. However, when the events are of such importance that failure to disclose them could distort the ability of users of the annual accounts to evaluate them, information on the nature of the subsequent event shall be included in the notes to the financial statements together with an estimate of its effect or, where appropriate, a statement of the impossibility of making such an estimate.
As regards the information to be disclosed in the notes to the financial statements, whether normal, abridged or for SMEs (note on Subsequent events), PGC establishes that the following shall be reported:
Subsequent events that disclose conditions that did not exist at year-end that are of such significance that failure to disclose them could affect the ability of users of the financial statements to evaluate them. and which are of such importance that, if information on them is not provided, it could affect the ability of users of the annual accounts to evaluate them. In particular, the subsequent event shall be described and the estimate of its effects shall be included. In the event that it is not possible to estimate the effects of the aforementioned event, an express statement to this effect shall be included, together with the reasons and conditions that make such estimation impossible.
Accordingly, entities should assess the significance that the situation is having and/or may have on the entity and accordingly describe in the note on Subsequent events in the notes to the financial statements the nature of the event and an estimate of its economic-financial effects, or make a statement that such an estimate cannot be made and the reasons for this.
Possible disclosures in the December 31, 2021 financial statements that may be required as a result of the war in Ukraine may include, among others:
- Estimates of impairment of financial assets (expected credit losses) and non-financial assets.
- Breach of covenants in loans or other agreements/contracts.
- Generation of situations that result in debt or other instruments having to be repaid early.
- Waivers or changes in the contractual terms of loans or other agreements.
- Supply chain disruption or other business disruptions.
- Suspension or termination of contracts, and the assessment of whether a contract for the sale or purchase of goods or services is an onerous contract.
Other important aspects to be analyzed are:
- Impairment tests: it is expected that the forecasts, projections and associated assumptions used for impairment tests do not reflect the effect of this conflict. The reason for this is that, in measuring the recoverable amount of financial and non-financial assets (and CGUs), it is necessary to use projections that are based on reasonable and supportable assumptions that represent management's best estimate of the range of economic conditions that will exist over the remaining useful life of the asset. Such reasonable and supported assumptions must be made at the date of the annual accounts, generally December 31, 2021.
- Consequently, the forecasts, projections and valuations used for the impairment calculations as of December 31, 2021 should be reviewed to ensure that any significant effects of the conflict are not incorporated retrospectively.
However, as mentioned above, it is a different matter if the foreseeable impact on the impairment tests of the event (if this is possible at the date of formulation) is reported as a subsequent event in the corresponding note in the notes to the financial statements.
- Going concern considerations: as established in PGC 23, "in any case, the preparation of the annual accounts must take into account any information that may affect the application of the going concern principle. Consequently, the annual accounts shall not be formulated on the basis of said principle if the managers, even after the close of the fiscal year, determine that they intend to liquidate the company or cease its activity or that there is no more realistic alternative than to do so".
-Management report: As is well known, Article 262 of the LSC, which establishes the contents of the management report, requires reporting on "(...) the important events for the company that occurred after the closing of the fiscal year, (...)".
