Genus plc – Annual report – 30 June 2022
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 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 Her 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 for a licence to HMT 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; use 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. As at 7 September 2022, we are awaiting a response from HMT.
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 2022, we had a cash balance of £4.5m in the Russian entities of which £3.9m is not currently available to be used by the Group due to being received from or held in sanctioned banks. If the Group were to obtain the licence from HMT referred to above the £3.9m would be available to be used by the Group.
Management have performed an assessment of the operations and cash flow over a period of 18 months from 30 June 2022 to 31 December 2023 based upon the 2023 operating 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 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. We have concluded that we do have control for the year ended 30 June 2022, as defined under IFRS 10 ‘Consolidated financial statements’ over the Russian-based subsidiaries and are still able to consolidate despite short-term restrictions on extracting cash. We have assessed each of the asset balances for impairment. The material areas that could give rise to impairment are:
- PIC Russia farm (£3.7m) – 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 open market price (less cost to sell) the property would support the carrying value.
- Trade receivables (£6.0m) – the ongoing financial sanctions may affect the ability of our customers 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 (£2.9m) – 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.
The impairment analysis performed by management indicates that under the current business environment and based on the plans for the Financial Year 2023 no impairment is required as at 30 June 2022.
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 of the Group. 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 £16.6m 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 of the Genus Group from the date of any deconsolidation. Revenues from the Russian entities were £14.6m in the financial year 2022.