How the Russian Invasion of Ukraine is Affecting Accounting

The Russian invasion of Ukraine places a direct emphasis on those geographic locations, but the impacts of this military activity extend well beyond the borders of these two countries. The resulting economic sanctions to punish Russia have disrupted global supply chains for trade and business deals, compounding existing woes.

If your business has any involvement with Russia or Ukraine, whether through overseas facilities, selling goods or services there, or importing goods from there, you should speak to your accountant about the effect of the Russian invasion on accounting and financial reporting.

If you haven’t already, you may encounter production and inventory challenges related to the Russian invasion of Ukraine even if your business is smaller and you don’t rely directly on imported products and parts. This is because global supply chain disruptions can wreak havoc on domestic suppliers.

You should keep track of international economic sanctions to see how they might affect your business, especially your accounting. Tell your accountant about any existing business dealings you have with Russian entities, so they can help you plan for the foreseeable future. Additional notes to your company’s financial statements might be needed. While it may be difficult to predict how future sanctions will take shape, it is a safe bet to anticipate that more sanctions are coming.

Ukraine Image
Ukraine Image

The Challenges of Accounting for Inventory and Future Forecasting

Sanctions can lead to interruptions of production not only in the countries directly subject to the sanctions but also in other global partnerships that do business with secondary ties to Russia. These interruptions can have a domino effect where time-sensitive inventory or other assets may be lost or delivery significantly delayed due to shipping constraints or facility closures. This poses new challenges associated with production and accounting for inventory and asset purchases.

Despite the uncertainty and issues with accessibility, accountants will need to update future forecasts for profit potential in addition to updating their risk assessments to reflect the reality of war-time operations. Accountants may also review assets reported at fair value and existing receivables to identify any potential impairment situations. Updating valuations, forecasting future profits, and identifying credit impairments can quickly become complicated in this destabilized setting, especially as foreign currencies become restricted and involve multiple, time-consuming exchange rates.

Some businesses may choose to reduce operations or withdraw from affected countries voluntarily, which can present problems for those partnerships, vendors, suppliers, or customers who depend on that link in their supply chain. Even without these closures, there will likely be a reduction in sales and earnings capabilities simply due to the economic uncertainty in the region.

Supply Chain Disruptions Image
Supply Chain Disruptions Image

Russian Cyberattacks and Threats

Global government-imposed sanctions are not the only obstacle to accounting processes in Ukraine and its partners abroad. Russia has been fighting back against economic sanctions and allies of Ukraine with its own government-sanctioned cyberattacks.

Businesses that remain in operation in Ukraine and any of their allies or business partners may be likely targets of a Russian-based cyberattack. That includes businesses of all sizes in the U.S. since Ukraine exports roughly $1.5 billion in goods (before the war) to the U.S. Moreover, the U.S. Congress is considering President Biden’s proposal for a $40 billion package of military, humanitarian and economic aid to Ukraine.

Russian cyberattacks are not just about inflicting damage on Ukraine and its allies but also about economic gains since Russian banking systems have largely been cut off from the rest of the world. Therefore, now is an excellent time for business entities worldwide to evaluate cybersecurity programs in anticipation of an attack.

Diligent Accounting and Reporting is More Crucial than Ever

Ultimately, it is your job to ensure that you thoroughly evaluate, account for and disclose potential risks to the bottom line in compliance with all relevant reporting agencies—the SEC, FASB, IFRS, GAAP, and Swiss GAAP FER. These considerations can include everything that would disrupt operations, from potential cyberattacks to supply chain disruptions to challenges on the ground with daily operations.

If your company has any type of exposure to impacts from the war in Ukraine, contact your Landmark advisor for guidance on how the Russian invasion of Ukraine might affect your accounting.