We considered that European companies are more likely to be affected by the war in Ukraine than non-European companies. We also considered that large listed companies are more likely to be affected than smaller, non-listed companies. We therefore included the top 100 companies in terms of free float market capitalisation as of April 2023 of the STOXX Europe 600 that apply International Financial Reporting Standards (IFRS). A list of companies surveyed can be found in the Appendix 1. For calendar year-end companies we surveyed the 2022 annual reports. For non-calendar year-end companies we surveyed the annual report with a reporting date closing after 24 February 2022 (so for companies with a 30 April or 30 June year-end we took the 2021/22 reports rather than the 2022/23 reports). We made that decision to make sure we captured the impact of the war from the start. For companies with a balance sheet date shortly after 24 February 2022 (31 March 2022 and 30 April 2022), we did check whether the annual report 2022/23 provided any further relevant information about the impact of the war.

Russia consistently refers to its military activities in Ukraine as a ‘Special Military Operation’ and considers it illegal to refer to these activities as ‘war’ or ‘invasion’. Shortly after Russian troops entered Ukraine on 24 February 2022 we saw some reluctance by companies using terms like invasion or aggression of Russia in order to protect any employees or agents located in Russia against repercussions by the Russian government. We researched the terminology used in the annual reports of the 100 European listed companies and classified them in terms of whether the company explicitly identified Russia as the aggressor, or whether more neutral terms were used. Examples we found of the former are terms used like ‘invasion’; ‘war on Ukraine by Russia’; ‘Russia’s war of aggression against Ukraine’; ‘Russia’s attack on Ukraine’ and ‘Russian government’s brutal and senseless invasion of Ukraine’. Examples we found on the latter include ‘conflict between Russia and Ukraine’; ‘war in Ukraine’; ‘geopolitical situation in Ukraine’; ‘crisis in Ukraine’; and ‘confrontation’. No company used the official Russian term ‘special military operation’.

We performed further analysis of the terminology used. Only 15 companies consistently used the same terminology throughout the annual report. All 15 used neutral terms such as ‘conflict between Russia and Ukraine’ or ‘war in Ukraine’, which suggests a deliberate attempt not to identify one party as the aggressor. Two companies did not include any reference to the war in Ukraine in the annual report. The remaining 83 companies used between 2 and 6 different terms to refer to the war in Ukraine. Sometimes the use of different terminology was linked to different sections of the annual report where apparently different authors had drafted the text of each section without further editing for consistency. In other cases, it seemed like a random use of terminology.

Second, we found that more than half of the companies (58%) used terminology that identified Russia as the aggressor where the rest remained more neutral. We tried to find a relationship between the terminology used and any exposure to Russia to see whether such exposure would deter companies from antagonising the Russian government. Companies with assets or sales in Russia were slightly more guarded in identifying Russia as the aggressor (56%) versus companies that did not have any sales or assets in Russia (67%). We did not find a relationship between country of headquarter of the company and terminology used, which is probably caused by the fact that these are virtually all Western European headquartered companies, which countries all side with Ukraine. However, we found a strong relationship between terminology used and the sector companies are operating in. Using the ICB industry codes we found that 91% of the companies in the banking sector (code 3010) and 100% of the stock exchange operators (code 3020) and companies in the energy (code 6010) and utilities (code 6510) sector used terminology indicating Russia as aggressor in this war. On the other hand, all companies in the construction sector (code 5010) used neutral terminology. In the remaining sectors companies were mixed in terminology used.

In this article we will consistently use the term ‘war in Ukraine’ as that is the most widely (84%) used term in the annual reports of the surveyed companies.

Section 2 describes the direct impact of the war in Ukraine on the financial performance and financial position of companies, as reported in the management report and the financial statements. These comprise loss of control over subsidiaries, loss of joint control over joint arrangements, loss of significant influence over associates, recognition of impairment losses of intangibles and property plant and equipment, additional expected credit losses, recognition of provisions for risks and (insurance) liabilities, and additional expenses incurred, all directly related to the war. Section 3 describes other consequences such as sanctions, impact on employees and communities and how management has helped these, impact on alternative performance measures and management remuneration, all as reported in the management report. In section 4 the findings in the auditor reports are analysed. The article closes with some overall conclusions in section 5.

Companies surveyed tend to be globally operating companies that are from time to time confronted by geopolitical unrests in the world. That means we only included in our research references to the war in Ukraine when a company specifically mentioned Russia, Ukraine or Belarus or where it was clear from the context.

Although in our research we report on the impact of the war in Ukraine on companies, as included in their annual reports, this does not mean that this provides the whole picture of the consequences of the war in Ukraine. Such an analysis would require comparing the actual performance with a hypothetical performance in a universe where there was no war in Ukraine. So, although we can capture actual impairments recognised or provisions taken as a result of the war in Ukraine, this does not mean that without the war in Ukraine other amounts would have been the same as it is unknown what revenue and costs would have been without the war. We can only speculate on the net effect as on the one hand prices may have been lower, reducing revenue and expenses, but on the other hand volumes may have been higher without the trade restrictions.

The events in February 2022 do not stand on their own. Tensions between Russia and Ukraine date back before and were already exacerbated by the invasion of Crimea by Russia in 2014. This did not significantly affect business between Europe and Russia, evidenced by the dependence of European countries on Russian oil and gas that even increased until the events in February 2022. What made an essential difference in February 2022 when Russian troops entered Ukraine is that the Western world condemned the Russian invasion and started with sanctions against Russian individuals and companies. In retaliation the Russian regime issued countersanctions. In our survey 71% of the companies reported sanctions specific to Russia and Belarus. Of the remaining 29% most of the companies indicated to have no sales or assets in Russia or that the war in Ukraine had no material impact on the company. The combination of the war and sanctions made it more difficult for businesses to continue operating in Russia (and Belarus as its ally). At the same time the war in Ukraine physically hampered business in and with Ukraine, so some companies with operations in Ukraine were forced to close businesses and help their employees.

On top of the sanctions came political and social pressure on companies to withdraw from Russia. Shortly after the Russian troops had entered Ukraine and Western responses followed, some companies announced their withdrawal from Russia. Yale School of Management maintains a database of more than 1,000 companies that announced their intentions with business in Russia¹. The researchers continuously update the database and categorise those announcements. Table 1 contains an overview of the Yale classification of the 100 companies surveyed in this article. It shows that as per the date we closed this article (31 August 2023) 76 of the companies had made a public announcement according to the Yale database. Of the 76, 26 (34%) companies had publicly announced withdrawing from Russia. The other 50 companies indicated to reduce or suspend their activities, to wait and see or to deliberately retain their activities in Russia. The latter could have humanitarian reasons such as supply of food and medicines. Of the 24 companies that had not made an announcement (yet) according to the Yale database, we found in the annual report that 17 had no sales or assets in Russia. Five more companies indicated the war in Ukraine did not have a material impact. The remaining two companies reported to have seized operations in Russia, so should have been considered part of the ‘withdrawal’ group.

We analysed whether and how these announcements had actually resulted in actions and how they were reflected in the financial statements. In Table 2 the results are summarised. It seems like more companies have exited or are in the process of exiting Russia than announced according to data from Yale. On the other hand, fewer companies than announced have suspended operations. And 41 companies with sales or assets in Russia have no reported intention to leave Russia or stop sales in Russia. Some of these companies explicitly state that they comply with sanctions, so have stopped some sales, for example in the defense or construction sectors.

Interestingly two companies report an intention to sell or even having a preliminary agreement to sell, with no reclassification to ‘held for sale’ and for which they expect the sale will lead to a further significant loss without recognising this as an impairment. In both cases the criteria for held for sale classification have apparently not been met and the value in use is considered to be significantly higher than the price they expect to receive upon sale. In both cases the reason why no impairment or provision for onerous contracts was recognised is not explained.

We found three companies that have withdrawn or are in the process of withdrawing from Russia, but apparently want to retain the option to return. Two negotiated a repurchase option of the investment they sold (one explicitly mentioned the repurchase option is based upon fair value). One company sold its operations in Russia but retained the right to a franchise agreement with the buyer when circumstances change. A repurchase option of the shares (including voting rights) constitutes what IFRS 10 refers to as potential voting rights. Such potential voting rights need to be considered when assessing whether control is retained. None of the companies disclose why control has still been transferred. This could be due to the fact that the repurchase option is not currently exercisable or not substantive (IFRS 10.B47). If control is not retained, the repurchase option is a derivative scoped within IFRS 9 and measured at fair value.

Of the 17 companies that had reported the intention to exit Russia and had not already seized or suspended operations by the balance sheet date, 9 classified non-current assets as ‘held for sale’. Classification as held for sale is required if the carrying amount will be recovered principally through a sale transaction rather than through continuing use (IFRS 5 par. 6). For this to be the case the asset must be available for immediate sale in its present condition and its sale must be highly probable (IFRS 5, par. 7). Par. 8 of IFRS 5 clarifies what it takes for the sale to be highly probable. Amongst others the sale should be expected to qualify for recognition as a completed sale within one year. The assessment of whether operations in Russia meet the criteria to be reclassified to ‘held for sale’ in accordance with IFRS 5 is judgemental, even if a (preliminary) agreement has been signed. This is due to the regulatory approval by Russian authorities which is uncertain, as well as the condition that the sale must be expected to be closed within one year. This may explain the divergence found in companies reclassifying their operations to ‘held for sale’ or not. We did not find an explanation in the financial statements of why the criteria had or had not been met.

In the wake of the events on 24 February 2022 academic research into the financial and economic consequences of the war in Ukraine confirmed the significant negative impact on stock markets and the banking industry, amongst others. Ahmed et al. (2023b) found a significant negative average abnormal return of the STOXX Europe 600 share prices around 21 February 2022, the date of Russia’s declaration of its recognition of two independent states in eastern Ukraine. This led to (additional) sanctions against Russia and was shortly after followed by Russian troops entering Ukraine. They also found negative and significant cumulative abnormal returns with 21 February 2022 as the event date, indicating the prolonged negative effect on European equity markets. Boubaker et al. (2023) focused on share prices in the banking industry globally and found a significant negative effect on equities throughout the globe, and Europe in particular, and that shares of banks fell more than overall equity markets. They used 24 February 2022 as the event date to calculate abnormal returns and just like Ahmed et al. found this effect to be persistent when the war continued. Interestingly, both Ahmed et al. as well as Boubaker et al. point to the imposed sanctions as the main reason for the significant and prolonged negative effect, rather than the immediate losses caused by the war. This is understandable, as those sanctions, if persisting, have a long-term negative impact on future cash flows of the companies involved. Ahmed et al. (2023a) focused on the link between the ESG score of companies and their exposure to Russia and the timing of the announcement to withdraw from Russian. It confirmed the significant loss of shareholder value due to the war in Ukraine and that “investing in more highly rated ESG firms did not offer protection against war-induced market declines”. Their findings further reveal that “more highly rated ESG firms were not less likely to operate in Russia nor more likely to meaningfully inform investors about such activities” and that “many firms scrambled to announce the suspension or divestment of their Russian operations, but those firms that are alleged to be more socially responsible were neither quicker, nor more likely, to announce such actions”.

The developments in Ukraine and the related sanctions on Russia and the countersanctions from Russian side resulted in uncertainties and the need for transparency around the impact on the financial position and performance of the companies, particularly in Europe, as reported in the management report and financial statements. There is no specific guidance on the accounting for the war in Ukraine, but the IFRS standards provide sufficient guidance to reflect the consequences. To help preparers and users, publications were issued by the large networks with reminders of IFRS accounting issues, specifically focused on the war in Ukraine.² The importance of transparency around the impact of the war in Ukraine also led the European Securities and Markets Authority (ESMA) to include this in the 2022 European common enforcement priorities. ESMA “calls for caution regarding any separate presentation of the impacts of Russia’s invasion of Ukraine in the profit or loss statement. Due to the pervasiveness of such impacts, a separate presentation may not faithfully represent an issuer’s overall financial performance and may be misleading to users’ understanding of the financial statements”. Instead, the notes should include information about estimates and judgements made that should provide information that allows users to assess the impact. This is comparable to the ESMA call for caution against presenting separately the effects of Covid-19 during the pandemic and the Emerging Issues Task Force decision³ against extraordinary treatment for terrorist attack costs after the September 11 events. Also, ESMA included reminders about judgements around loss of control, joint control or significant influence, discontinued operations and impairments. We will address these in section 2.5.

Companies can be impacted by the war in Ukraine in several ways. In this paragraph we will focus on the immediate impact of the war, as reflected by losses recognised in net income explicitly linked by the company to the war in Ukraine. These losses include impairments recognised on the (in)tangible assets or investments and receivables of the company and provisions recognised. The war in Ukraine also has indirect effects such as price increases of energy and food, reduced activities due to sanctions and in general a slowing down of economies worldwide. In this paragraph we will focus on the former, i.e. direct effects, but will come back to the indirect effects at the end. Of all companies surveyed, 49 (49%) reported a material impact on net income. The total amount of losses recognised by these 49 companies is EUR 71.3bn, or on average almost EUR 1.5bn per company. The amounts reported by individual companies in the total population ranged between zero and USD 25.5bn. Measured against equity these 49 companies on average reported losses of 2.54% of their equity. The percentage reported by individual companies in the total population ranged from 0% to 30.75% of reported equity as per balance sheet date.

We see significant differences between the various sectors. Figure 1 provides a sector analysis of the impact of the war in Ukraine on companies, measured by percentage of companies reporting losses due to the war and the maximum reported impact in percentage of equity within that sector. None of the ten health care companies reported any material impact of the war in Ukraine. On the other hand more than 80% of the companies in the automobile, food, beverage and tobacco and energy sectors reported material losses due to the war. In terms of the magnitude of the impact, the energy sector is clearly the most heavily hit, despite the increase in prices of oil and gas. This is mainly due to the withdrawal from the Russian market, causing impairments and losses on sale of Russian entities and operations.

As discussed earlier the amounts mentioned above only include the losses recognised in net income where the company explicitly linked such loss to the war in Ukraine. In addition, the impact on economies worldwide has an indirect effect of reducing business activities, thereby reducing revenue and in the end net income of these same companies. Those effects are much more difficult to measure. We did not find companies attempting to do so. However, we did find one company that saw the loss of some specific revenue as due to the war in Ukraine. SAP⁴ reported: “In 2022, SAP’s business was impacted by the war in Ukraine and SAP’s decision to wind down its business operations in Russia and Belarus. Compared to the previous year, revenue was approximately €220 million lower.” Other companies considered the impact of the war in Ukraine on revenue important enough to provide the user with adjusted comparatives such that growth rates excluded revenue from the region in both the current year and comparative year. This is further discussed in section 3.2.

Table 3 provides an overview of the nature of the items recognised as losses and reported as resulting from the war in Ukraine. By far the most important underlying cause for these losses is the withdrawal of business from Russia and the related impairment losses, losses on sales of Russian operations and provisions for termination of Russian employees and litigation in Russia. The second major underlying cause are credit losses on receivables on Russian entities and individuals and those that are dependent on Russian business. In addition, some companies lost revenues from contracts with Russian customers.

Before we dive into the details found, it is worth noticing that it is not always possible to make a meaningful distinction between the various types of impairment losses reported. Most companies that exited the Russian market went through a similar chain of events, which is to first consider potential impairment of owned assets, then to consider whether they should be classified as held for sale (or discontinued operation) and perform another impairment test, and finally to recognise a gain or loss on the actual sale. Depending on the phase in the process the company found itself in, it presented losses in each of the three buckets of losses. So even though below we distinguish between each of the three as they are presented by companies, they are effectively all part of the same economic loss.

We analysed the annual reports for any donations or other help that the surveyed companies provided to its Ukrainian employees or other citizens of Ukraine. We found 60% of the companies referring to help provided. The beneficiaries range from own employees, citizens in Ukraine, Ukrainian refugees in other countries to local organisations and international NGOs. The kind of help ranges from monetary amounts to donations in kind in all sorts of ways. As an illustration, Figure 4 contains a snapshot from the Universal Registration Document 2022 of Axa explaining the various ways they have helped Ukrainian citizens.

We did not find companies presenting the impact of the war in Ukraine separately in the profit and loss account. This may have been the effect of ESMA’s call for caution against this, referred to in section 2.3. However, given the significant losses recognised by the surveyed companies, evidenced by the data in sections 2.4 and 2.5 the question arises whether these amounts were considered as unusual, non-underlying or exceptional and excluded from the Key Performance Indicators used in assessing and explaining financial performance. In other words, we analysed whether alternative performance measures (APMs) were used to avoid the effects of the war in Ukraine impacting the KPIs. We analysed whether new APMs were introduced or the definition of an existing APM adjusted to allow for excluding the impact. We also analysed whether the existing APMs excluded the impact of the war or not. We found two ways of adjusting alternative performance measures for the impact of the war in Ukraine. Table 4 provides an overview of the findings.

We did not find companies introducing new APMs or changing the definition of an APM. However, two companies included additional information in the management report about operating profit and net profit excluding the impact of the war in Ukraine. Another company, London Stock Exchange provided additional information on growth rates excluding the Russia/Ukraine war for some performance measures: “Growth rates excluding the Russia/Ukraine war impact have been calculated by excluding income in the region and from sanctioned customers and related business from both periods. This amounted to £80 million in 2021 and £18 million in Q1 2022, and nil beyond that.”⁷

When we then look at the APMs used by the 49 companies that reported a material impact of the war, 29 (or 59.2%) adjusted some or all APMs for the impact of the war in Ukraine. One of the 29 companies adjusted APMs for only part of the impact. This company, SAP, adjusted APMs for the costs of restructuring due to winding down the business operations in Russia and Belarus, but the reduced revenue and bad debt provisions due to the war in Ukraine were not adjusted. The total amount of losses and expenses of the companies (partly) excluding the impact of the war in Ukraine in the APMs of these 29 companies is EUR 60.7bn which represents 84.9% of the total amount for all 49 companies (EUR 71.3bn).

Two companies did not adjust the current year amounts but excluded Russia/Ukraine from the 2021 comparatives. These are companies that sold or deconsolidated their operations in the beginning of 2022 or otherwise lost revenue in Russia and Ukraine due to the war. This adjustment restores comparability between the two years.

We analysed whether the losses due to the war in Ukraine were adjusted for the purposes of assessing management remuneration. In particular, we analysed the financial performance measures used in determining the amounts awarded as part of short-term incentive plans such as annual bonuses. Of the 49 companies for which the war in Ukraine had a material impact we analysed the KPIs used to assess profit-related financial performance and whether those profit related measures were adjusted to exclude the direct losses recognised due to the war in Ukraine. The results can be found in Table 5.

Of the 49 companies that reported a material impact of the war in Ukraine, slightly more than half (25 companies; 51%), representing some 75% of the total reported losses, adjusted the financial measures for losses recognised due to the war in Ukraine. The rest did not or used performance measures that are not affected by P&L items.

We found four remuneration reports where the remuneration committee explicitly discussed the impact of the war in Ukraine on management compensation. Allianz did not adjust its APMs for the impact of the war in Ukraine. However, the Supervisory Board of Allianz Group decided to exclude the € 437m loss caused by the war in Ukraine when assessing the extent to which financial targets were achieved in determining management remuneration (see Figure 5). British American Tobacco (BAT) adjusts its APMs for the impact of the war. Adjusted Profit from operations and adjusted diluted earnings per share are used to assess management performance in its short term incentive (STI) and long term incentive (LTI) plans. The Supervisory Board discussed whether to adjust the targets: “As Russia and Belarus have been part of the Group throughout 2022, it was decided not to make any adjustments to the 2022 STI and LTI targets set at the beginning of the year - both targets and the results are inclusive of contribution from our Russian and Belarusian businesses. The full treatment of our Russian and Belarusian businesses under IFRS rules, including impairment charges and associated costs, are detailed on pages 215, 266 and 267.”⁸ For HSBC the personal objectives of two executive directors for 2022 to a small degree depended on the successful exit from certain businesses including those in Russia⁹. HSBC did not adjust APMs for the impact of the war in Ukraine. Finally, London Stock Exchange’s remuneration committee discussed whether to adjust the financial targets for the lost revenues due to the war in Ukraine and decided against adjusting.

Table 6 provides an overview of the frequency and location of references to the war in Ukraine in the auditor reports surveyed.

Two auditor reports contained a KAM dedicated to the war in Ukraine. Another 30 KAM’s (of which 2 came from the same auditors that wrote the KAMs dedicated to the war in Ukraine) contained references to the war in Ukraine, for example in the context of impairment testing. So in 24 (24%) auditor reports the war in Ukraine was considered to be demanding attention for the auditor to an extent warranting the inclusion of a separate Key Audit Matter (KAM) or the reference in a KAM on another topic. In these 24 auditor reports 32 KAMs referred to the war in Ukraine (some auditor reports contained more than one KAM referencing the war in Ukraine). We will address these in more detail in section 4.2.

We found one reference to the war in Ukraine in the going-concern section of an auditor report. Interestingly, that company itself did not explicitly refer to the war in Ukraine in the going-concern section of the financial statements, although it does mention general geopolitical risks. The auditor reports to have performed “independent sensitivity analysis on management’s assumptions including applying incremental adverse cashflow sensitivities. These sensitivities included the impact of certain severe but plausible scenarios, evaluated as part of management’s work on the Group’s long term viability including the war in Ukraine, materialising within the going concern assessment period”.¹⁰ As referred to before we found three (3%) companies that mentioned in their going-concern or viability sections of the annual report that they had considered the impact of the war in Ukraine. In those three cases the auditor did not reference the war in Ukraine. We found no auditor report in which an emphasis of matter paragraph was included mentioning the war in Ukraine.

Finally we found seven references to the war in Ukraine in other parts of six auditor reports. These comprise the assessment of materiality (3 times), the risk assessment (2 times), the paragraph on general IT controls, referring to the cybersecurity risk related to the crisis in Ukraine (1 time) and in a general description of the changes in the audit approach compared to last year (1 time). Figure 6 contains an example of references to the war in Ukraine in the materiality assessment by the auditor. The exceptional charges caused by exiting Russia were eliminated before assessing materiality. In prior year, such elimination of exceptional charges had not taken place.

Table 7 provides an overview of the findings, in particular the key judgements the auditor is referring to in the KAMs. The two KAMs dedicated to the war in Ukraine focused on the consequences of the divestment and discontinuation of business in Russia. In the other 30 KAMs the war in Ukraine was considered to be an element of attention for the auditor in addressing specific judgements or estimates made by management. Unsurprising, the vast majority of the KAMs related to impairment assessments of assets (both financial and non-financial).