The FIN-FSA and ESMA are monitoring on an enhanced basis the operating environment related to the war in Ukraine, also from the standpoint of financial reporting. The importance of transparency in financial reporting increases as uncertainty grows.

ESMA expects companies to provide sufficient information in their future financial reporting on the actual and potential future impacts of the war in Ukraine on their operations, financial position and cash flows. The most significant risks and uncertainties to which the company is exposed should also be clearly identified and sufficient information about them disclosed.

On 13 May 2022, ESMA published a public statement on upcoming half-yearly reports. The FIN-FSA wishes to draw the attention of companies, their audit committees and auditors to the following key points as they prepare their upcoming half-yearly reports, prepared in accordance with IAS 34 Interim Financial Reporting.

Scope of half-yearly report and adequacy of disclosures should be assessed with particular care

For many companies, it is expected that the war in Ukraine and its impacts will constitute a significant event under paragraph 15 of IAS 34, which will require the information presented in the last annual financial statements to be updated with information concerning the war and its impacts. Therefore the special situation caused by the war in Ukraine might require more detailed and extensive disclosures in the half-yearly report. Even in cases where a company operates in sectors or geographical areas that are susceptible to the effects of the special situation caused by the war, but no material impact on financial reporting has arisen, it is appropriate to describe why this is the case.

Market uncertainty and the difficulty of forecasting increase the importance of management judgment and the information presented about it

Uncertainty about future development has increased significantly due to the impacts of the war in Ukraine, and this in turn will result in an increased level of management judgment in the preparation of interim reports. Due to changed circumstances, decisions that require management judgment might need to be reassessed and rejustified, such as the existence of control relationships in subsidiaries and the impairment of assets. In an uncertain market situation and with visibility being poor, the importance of scenario modelling is underlined in impairment testing. New uncertainties might also bring new financial statement items within the scope of management judgement.

The FIN-FSA expects comprehensive and sufficiently detailed information on the management judgment used in the preparation of half-yearly reports. Investors must be able to understand, on the basis of the information provided, which items have required management judgment and how management has exercised judgment in their decisions.

Audit committees are encouraged to engage in proactive and close dialogue with management and auditors

In addition to risk areas, it would be important for audit committees to pay special attention to the new judgments, estimates and forecasts used by management and to the adequacy of information disclosed about them. The FIN-FSA encourages audit committees to engage in proactive and close dialogue with management and auditors. Dialogue with the auditor may assist audit committees in their own oversight role, but it will also assist the auditors in their challenging assurance role in the prevailing uncertainty. The auditor must state in the audit report for the full financial year if, in the opinion of the auditor, the company’s half-yearly report has not been prepared in accordance with the provisions thereon.

For further information, please contact:

Sirkku Palmuaro, Senior IFRS Accounting Expert, sirkku.palmuaro(at)fiva.fi