Genus plc – Annual report – 30 June 2024
Industry: agriculture
4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (extract)
Impact of Russian sanctions
The Group has two group operating companies that are incorporated in Russia – Limited Liability Co. Genus ABS Russia and PIC Genetics LLC (‘Russian-based subsidiaries/entities’). Following the sanctions that have been put in place by the UK and other governments, the Group implemented a comprehensive screening process with external counsel to ensure that its Russian entities do not trade with sanctioned individuals or entities controlled by them. The main impact of the sanctions regime on our business has been to categorise the banks in Russia into sanctioned and non-sanctioned banks. Where we receive money from sanctioned banks we are unable to use the cash without a licence from His Majesty’s Treasury (‘HMT’). For cash receipts from non-sanctioned banks into the entities’ non-sanctioned banks we are able to use the cash in Russia for day-to-day operations.
The Group applied to HMT for a licence on 25 April 2022: to allow the use of payments from sanctioned banks by non-sanctioned Russian customers for the delivery of porcine and bovine genetics; to allow the use of money in a non-sanctioned Russian bank account in the name of Genus Russia to pay Russian suppliers who continue to use sanctioned Russian bank accounts; and to remit any excess money in Genus Russia’s non-sanctioned Russian bank account (regardless of whether it was received from a sanctioned or non-sanctioned Russian bank account) to other Genus Group company UK bank accounts.
The UK Office of Financial Sanctions Implementation (‘OFSI’) issued a general licence for trading in agricultural commodities in Russia effective on the 4 November 2022 which provides exemptions to the sanctions regime in connection with the export, production and transport of agricultural commodities. This definition includes reproductive materials such as are supplied by Genus. Under this general licence, receipts from non-sanctioned customers received from and before 4 November 2022 from sanctioned banks no longer need to be frozen and can be freely used. Also receipts from a sanctioned customer, if made through a non-sanctioned bank, no longer need to be frozen and can be freely used. If any customer is or becomes sanctioned and pays through a sanctioned bank, these funds would still need to be frozen even after 4 November 2022.
Under the requirements of IAS 7, where there is cash that is not available to be used by the rest of the Group this needs to be disclosed. As at 30 June 2024, we had a cash balance of £5.2m (30 June 2023: £3.1m) in the Russian entities of which £0.9m (30 June 2023: £0.8m) is not currently available to be used by the Group due to being received from sanctioned banks and held in a sanctioned bank.
Management has reviewed the operations and cash flow over a period of 18 months from 30 June 2024 to 31 December 2025, based upon the 2025 plans, to determine whether the Russian entities have sufficient non-sanctioned cash flow to enable them to continue day-to-day operations and to meet liabilities as they fall due. The analysis indicates they do have sufficient non-sanctioned cash flow to enable them to meet their day-to-day operational needs.
Critical accounting judgement – exercise of control
Management has assessed whether the actions of the UK and Russian Governments have caused the Group to lose control of these Russian-based subsidiaries.
Genus PLC applied for a licence to the Department for International Trade (‘DIT’) on 22 September 2022, to allow for UK-based employees within the Genus group to provide accounting, business and management consulting services to the Russian-based subsidiaries, for the purpose of helping them carry out business operations in Russia, delivery of humanitarian assistance activity and for the production or distribution of food, provided that it is for the benefit of the civilian population.
The licence was authorised by the DIT and came into force on 11 January 2023. It authorises the following services:
- The fullest possible range of accounting services, business and management consulting services, to include advisory, guidance and operational assistance services provided for business policy and strategy, and the overall planning, structuring, and control of the organisation.
- The oversight that a parent company would typically provide to its subsidiaries in the areas of accounting, financial controls, tax, treasury, finance and human resources, along with similar oversight in the areas of information technology, supply chain and other types of technology.
The licence expires on 11 January 2025 and, provided the facts and circumstances surrounding the issuance of the licence currently in place do not change materially we do not foresee any reasons why the licence could not be renewed.
We have concluded that we do have control over the Russian-based subsidiaries for the year ended 30 June 2024, as defined under IFRS 10 ‘Consolidated financial statements’, and we are still able to consolidate them despite short-term restrictions on extracting cash. We have also assessed each of the asset balances for impairment. The material areas that could give rise to impairment are:
- PIC Russia farm: £2.5m (30 June 2023: £2.4m) – the value of the farm is predicated on the future economic benefit of the animals that are being reared there. We would need to assess if the property’s open market price (less cost to sell) would support the carrying value.
- Trade receivables: £4.4m (30 June 2023: £2.7m) – the ongoing financial sanctions may affect our customers’ ability to pay us for their goods. If it is determined that our customers are unlikely to repay these amounts, then they should be provided for.
- IAS 41 valuation: £2.7m (30 June 2023: £3.9m) – the ongoing impacts of both the local economic outlook and our customers’ ability to pay us could result in a reversal of the fair value of the Russian biological assets in the June valuation.
Management’s impairment analysis indicates that, under the current business environment and based on the plans for the FY25 no impairment is required as at 30 June 2024.
Management will continue to monitor the situation closely to see if any further changes require additional analysis that may result in a different conclusion.
In the event of changes in legislation, such as more restrictive sanctions imposed by the UK Government or actions taken by the Russian Government, we may determine that we do not exercise control, as defined under IFRS 10 ‘Consolidated financial statements’, over the assets and operations of the Russian entities and we would not be able to consolidate these companies into the Financial Statements. The deconsolidation would mean that we would reclassify the Russian entities as investments and we would need to assess for impairment. A charge of up to £15.8m (2023: £11.7m) may need to be recognised in the Income Statement, representing the total net assets of the two Russian entities. Dependent on the nature of the events leading to the decision to deconsolidate the entities, there may be additional expenses incurred which we are unable to estimate at this time. In addition, revenues would not be consolidated into the Financial Statements from the date of any deconsolidation. Revenues from the Russian entities were £15.0m in the year ended 30 June 2024 (2023: £21.7m).
Accounts examples 