The situation surrounding the Middle East conflict continues to evolve, with governments making ongoing announcements relating to military developments and other geopolitical measures. To the extent such developments occur after the end of a reporting period, entities will need to carefully evaluate whether they constitute an adjusting or non-adjusting subsequent event.

Entities with financial reporting date as at 31 December 2025

The developments arising from the conflict after the reporting date is a non-adjusting event for entities with 31 December 2025 financial reporting date.

If the event is material, the entity should disclose its nature and an estimate of its financial effect. If the entity is unable to estimate the financial effect, it should disclose that fact. The entity should consider disclosing the impact on the following items (list is not exhaustive):

•  Breach of loan covenants
• Changes in economic and market conditions affecting fair values of assets and liabilities
• Changes in impairment assessments of non-financial assets
• Additional expected credit losses due to declining repayment ability of certain debtors
  

Auditors should perform audit procedures to obtain sufficient appropriate audit evidence that the required disclosures have been identified and assess whether those disclosures are adequate.

Entities with financial reporting date on or after 1 January 2026

Depending on the financial reporting date, the developments arising from the conflict could be considered a current period event, subsequent adjusting event or subsequent non-adjusting event. Hence, assessment is required.

If determined to be a subsequent material non-adjusting event, the entity should disclose its nature and an estimate of its financial effect. The entity should consider disclosing the impact on the following items (list is not exhaustive):

• Breach of loan covenants
• Changes in economic and market conditions affecting fair values of assets and liabilities
• Changes in impairment assessments of non-financial assets
• Additional expected credit losses due to declining repayment ability of certain debtors
  

Auditors should evaluate management’s assessment and the adequacy of management’s disclosures.

Given the heightened geopolitical uncertainty, auditors should place sufficient focus on reviewing financial statement disclosures for affected entities. Where an entity is significantly impacted, users can only fully understand how the developments arising from the conflict and the resulting economic impact have affected the entity’s financial position and performance through comprehensive disclosures.

If developments arising from the Middle East conflict are expected to significantly impact the entity’s business, this may affect its liquidity and consequently, its going concern assessment. This assessment is to be performed up to the date that the financial statements are authorised for issue.

Auditors should evaluate management’s going concern assessment with specific attention to key elements of the assessment, for example:

• Cash flow projections incorporating potential impact from the conflict, such as higher energy costs, supply chain disruptions or increased logistics and insurance costs.
• Sensitivity analyses on key assumptions.
• Probability weighted scenarios to account for the uncertainty surrounding geopolitical developments and their potential economic impact.
  

Where the use of going concern assumption is appropriate but material uncertainty exists, and adequate disclosures have been made in the financial statements, the auditors are reminded to include a separate ‘Material Uncertainty Related to Going Concern’ section in the auditor’s report. Where the use of going concern assumption is inappropriate and the financial statements are prepared on a going concern basis, the auditor should express an adverse opinion.

If the going concern assumption is no longer appropriate, there is a fundamental change in the basis of accounting and this should be disclosed in the financial statements.

As part of the risk assessment, auditors should understand how developments arising from the Middle East conflict may affect the entity’s operations, financial position and business environment, and how these changes may give rise to risks of material misstatement. Attention should be paid to situations where the impact of the conflict may be significant due to the nature of the entity’s business or industry, or where there are substantial disruptions to supply chains, logistics arrangements or energy costs.

Characteristics of entities that may be significantly impacted include:

• Entities with energy-intensive operations or significant exposure to oil and fuel price volatility.
• Entities relying on shipping routes through the Middle East, including the Strait of Hormuz, which may experience logistics disruptions, delays or increased freight and insurance costs.
• Entities with suppliers, customers or operations in regions directly or indirectly affected by the conflict, which may face operational disruptions or sanctions-related restrictions.
• Entities with concentrated or inflexible supply chains, where disruptions may affect the availability or cost of key raw materials or components.

Developments arising from the Middle East conflict could have a significant adverse impact on the recoverable amount of assets.

Potential indicators may include:

• Higher operating costs and supply chain disruptions

  -        Increased fuel and energy prices, higher freight or insurance costs and delays in raw material deliveries can negatively affect projected cash flows.

  -        Prolonged disruptions, for example via the Strait of Hormuz, may materially increase operational expenses and reduce profitability.

• Operational or strategic changes

  -        Adjustments to production locations, rerouting supply chains or changes in business models to mitigate conflict-specific risks may render certain assets under-utilised or obsolete.

  -        Assets used in operations exposed to conflict-specific risks may not operate at expected capacity, especially in energy-intensive or logistics-heavy production.

• Decline in demand and revenue / termination of revenue contracts

  -        Revenue contracts dependent on affected regions or supply lines may be renegotiated or terminated, affecting future cash flows.

• Net assets of the entity are more than its market capitalisation.
  
  

Entities and auditors should evaluate whether assumptions used in impairment assessment reflect current trade and market conditions. Key assumptions in value-in-use calculations that may be affected include:

• Revenue growth rates, considering potential demand contraction or contract losses.
• Discount rates adjusted for heightened geopolitical and operational risk.
• Gross margin projections accounting for increased energy, logistics and procurement costs.
• Working capital requirements reflecting potential delays in inventory turnover or receivables collection.

Entities and auditors should also evaluate the adequacy of disclosures related to significant judgment / key assumptions used in determining recoverable amounts, including sensitivity analysis and range of possible outcomes.

Entities and auditors should evaluate the impact to ECL on receivables arising from potential defaults or delayed payments due to conflict-specific developments. In evaluating the assumptions and inputs used in estimating ECL, considerations include:

• Whether the uncertainty surrounding the conflict, including sanctions, shipping disruptions and energy price volatilities, is reflected in probability-weighted ECL.
• Whether the potential impact of the conflict and other macroeconomic factors are reflected in the forecasts of future economic conditions.   

The conflict may increase costs significantly such that the unavoidable costs of fulfilling the contract exceed the consideration to be received. Entities may have long-term supply and revenue contracts with fixed pricing or minimum volume commitments, which can become burdensome when conflict-specific disruptions drive up production, logistics or energy costs, or when customer demand is reduced. For example, a supplier affected by shipping delays, fuel price spikes or sanctions may struggle to meet its contractual obligations, which could in turn affect downstream customers’ ability to fulfil their obligations. Entities and auditors should be alert to such risks when reviewing contracts, particularly where contract terms no longer align with current operational or economic conditions resulting from the conflict.