لخّصلي

Introduction

• The war has significantly impacted the stability of the Palestinian economy, exposing risks that are not typical and creating challenges for businesses located and operating in Palestine.

Introduction

• The potential fluctuations in commodity prices, foreign exchange rates, restrictions to imports and exports, availability of local materials and services and access to local resources will impact Palestinian companies

Going Concern

IAS 1 Presentation of Financial Statements requires management, when preparing financial statements, to make an assessment of an entity's ability to continue as a going concern, and whether the going concern assumption is appropriate.

Disclosures are required when the going concern basis is not used or when management is aware, in making their assessment, of material uncertainties related to events or conditions that may cast significant doubt upon the entity's ability to continue as a going concern.

• Disclosure is also required when the judgement applied in determining the existence of a material uncertainty is significant

There may be a wide range of factors that can affect an entity's going concern assessment. Examples of factors that may need to be considered include:

• Loss of significant customer base/decrease in demand for products or services.

• Loss of significant production sites/critical suppliers.

• Inability to sell products through established channels.

There may be material uncertainties that cast significant doubt on the entity's ability to operate under the going-concern basis. When an entity prepares financial statements, it is required to disclose these material uncertainties in the financial statements in order to make clear to readers that the going- concern assumption used by management is subject to such material uncertainties.

Impairment of Non-Financial Assets

In the case of assets, there is a significant risk of physical damage or restricted access to assets, as well as the risk of impairment due to a decrease in recoverable amounts. An asset is impaired when an entity is not able to recover its carrying value, either by using it or selling it.

Impairment of Non-Financial Assets

Impairment Indicators

• Significant changes in commodity prices or other market rates.

• Significant changes with an adverse effect on the entity that have taken place during the period, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated. For example, the inability to operate in the market due to sanctions.

Measurement of Impairment Losses

When assessing impairment, entities are required to determine the recoverable amounts of the assets, being the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). When measuring FVLCD, fair value is measured in accordance with IFRS 13 Fair Value Measurement, which is explained below.

Change of Estimate

• Since the remaining useful life for many assets is long term, entities should consider not just the immediate effect, but also the subsequent effect of the events, which may continue for an unknown period.

• If the entity expects to abandon an item of property, plant or equipment at a future date, it will need to adjust the depreciable period and write down the carrying amount of the asset to its residual value if any over the period up to that date.

Fair Value Measurement

When valuations are subject to significant measurement uncertainty and there is a wider range of possible estimates of FVM, the entity is required to apply judgement to determine the point within that range that is most representative of FVM in the circumstances. (Fair value hierarchy).

Financial Instruments

• IFRS 9 Financial Instruments and IFRS 7 Financial instruments: Disclosures deal with the accounting for financial instruments and the related disclosures.

• Entities with lending activities will need to consider the requirements in IFRS 9 when measuring expected credit losses (ECLs) on loans and trade receivables made or committed to entities and individuals and financial guarantees granted involving such entities.

Insurance Recoveries

Entities often enter into insurance policies to reduce or mitigate the risk of loss arising from damage to, or loss of, assets or other events. However, careful consideration of those policies will be required to determine whether losses directly or indirectly attributable to the war are covered by insurance.

Inventories

IAS 2 Inventories generally requires entities to account for inventories at the lower of cost and net realizable value (NRV). Estimates of NRV may be subject to more estimation uncertainty than in the past, and determining the appropriate assumptions may require significant judgement. In some cases, entities may need to write off their inventories.

Investments in Subsidiaries

Investments in subsidiaries are accounted for in accordance with IFRS 10 Consolidated Financial Statements. IFRS 10 clarifies that an investor is required to reassess whether it controls an investee if the facts and circumstances indicate that there are changes to one of the three elements of control, being power over the investee, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns.

Investments in Subsidiaries

Investments in subsidiaries are accounted for in accordance with IFRS 10 Consolidated Financial Statements. IFRS 10 clarifies that an investor is required to reassess whether it controls an investee if the facts and circumstances indicate that there are changes to one of the three elements of control, being power over the investee, exposure, or rights, to variable returns from its involvement with the investee, and the ability to use its power over the investee to affect the amount of the investor's returns.

Events After the Reporting Period

Events after the reporting period are those events, favorable and unfavorable, that occur between the end of the reporting period and the date when the financial statements are authorized for issue.

• IAS 10 Events after the Reporting Period makes a distinction between adjusting and non-adjusting events after the reporting period.

Other Presentation and Disclosure Requirements

• An entity's ability to meet the covenant requirements included in long-term loan arrangements may be affected.

• IAS 1 requires that, when an entity breaches a covenant on or before the period end, with the effect that the liability becomes payable on demand, it is classified as a current liability.

Going Concern

Going concern Concept:

The going concern concept is one of the accounting principles.

It is the assumption that an entity is financially stable enough to meet its obligations

It will remain in business for the foreseeable future

It will not be liquidated or forced to discontinue operations

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Check for indicators, inability to settle its short-term debt that is due within 12 months from year end, recurrent losses, current losses, sufficiency of capital ( Business entities) or Net Assets (NGO), major interruptions i..e war or fire or earthquake loss.

Emphasis Of Matter - Going Concern

Based on auditor's professional judgement and indications arising from audit, a paragraph is added following the auditor's opinion if matter is not significant., or manage plan mitigate threat.

Management Plans Disclosure

Examples on intention to mitigate recurrent losses by management in subsequent periods:

1. 
   

   Inject capital in the company

   
   


2. 
   

   Generate additional revenues from operations

   
   


3. 
   

   Minimize overhead costs by 10%

   
   


4. 
   

   Reduce salaries in direct costs by 15%

   
   


5. 
   

   Develop new streams of income from operations (for business entities)

   
   


6. 
   

   Obtain additional funding from donors- submission of new proposals (NGOs)

   
   


7. 
   

   Discontinue segments that are not contributing to net income

   
   

Auditor's Responsibilities for the Audit of the Financial Statements

Auditor's responsibility paragraph in Independent Auditor's Report states:

"As part of an audit in accordance with ISA's, we exercise professional judgment and maintain professional skepticism throughout the audit.

We also, conclude on the appropriateness of management's use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Entity's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial statements or, if such disclosure are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the entity to cease to continue as a going concern."

This International Standard on Auditing (ISA 570) deals with the auditor's responsibility in the audit of financial statements with respect to management's use of the going concern assumption in the preparation and presentation of the financial statements.

Alternative basis of accounting vs. going concern

Under the liquidation basis of accounting, a company reports its net assets as being equal to the amount of estimated

cash or other considerations that it expects to collect as a result of the liquidation process.

Break-up basis' is used in some countries to signify that an entity is at a stage where its assets are being realised or are about to be realized as part of the process of liquidating the entity.

Estimates

Common estimate in FS in Palestine

• Valuation of Assets impacting valuation gains or losses, and other comprehensive income

• ECL - expected credit loss - Allowance for doubtful accounts

Other Allowances i.e. contingencies

Sample disclosure on estimates

4. Critical Accounting Judgments and Key Sources of Estimation of Uncertainty

The preparation of condensed interim consolidated financial statements requires management to make judgments, estimates, and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income, and expenses. Actual results may differ from these estimates.

Key assumptions relating to the future and other key sources of estimation uncertainty at the date of the financial information that has a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are disclosed in the individual notes on the relevant items of the financial disclosures below. The Group bases its assumptions and estimates on indicators available when preparing the consolidated financial information. However, current circumstances and assumptions about future developments may differ due to market changes or circumstances beyond the control of the Group. Such changes are reflected in the assumptions as they occur.

• IAS 36 Impairment of Assets requires an entity to test all assets that are within its scope for potential impairment when indicators of impairment exist.

• If there is an impairment indicator (regardless of where the asset is located), an impairment test must be performed.

Impairment of Assets

Physical Assets in Gaza with substantial impairment Between 7 October to 31, 12-2023

Due to lack of a basis for valuation of damageadequate disclosure and management estimates must be disclosed in notes.

Upon subsequent assessment of actual damage based on valuation reports by independent valuators, recognition of Impairment must be recorded in the accounts and properly reflected in the financial reports (use of auditor's expert needed)

War Impact on

Insurance Contracts- revenue recognition

Decrease in gross written premiums due to lockdown and closures. Q4/2023 production decreased by 14.94% if compared with Q4/2022.

Decrease in reported claims due to lockdown and closures. Q4/2023 reported No. of claims decreased by 16% if compared with Q4/2022 (value of those claims is around 27% decline)

Returned checks during Q4/2023 is around 22% compared to 15% in Q4/2022.

Expected default rates and expected credit loss is not assessed yet. However, the loss will be higher. Decline in ILS currency value c e if compared with USD which led to additional purchasing costs.

Decline in market prices for financial Investments.

Damage and loss of equipment/furniture owned and located in Gaza strip

War Impact on NGOs Sector

Decline in donors funding, focus on emergency response

More restrictions on signing new contracts with donors like EU and USAID.

Movement restrictions in West Bank, Jerusalem - also applies for business entities

Delay in executing projects activities in WB and freezing in Gaza as well. Damage and loss of equipment/furniture owned and located in Gaza strip.

War Impact on Pharmaceutical Industry

Disruption in supply chains.

Increase of shipping and import costs.

Decline in ILS currency value if compared with USD which led to more purchasing costs

Decline in market prices for financial investments..

More risk exposure regarding the receivable due from ministry of health due to stopping transfer of Maqqasa funds.

Damage and loss of equipment/furniture owned and located in Gaza strip

War Impact on Banking Sector

Closure of Gaza branches and decline on revenues/operations.

Damage and loss of equipment/furniture owned and located in Gaza strip.

Very high losses in Gaza market regarding the assets owned and credit facilities issued.

Increasing default rates in WB due to stopping transfer of Maqqasa funds to PNA and thus not paying

government workers beside Workers in the occupied territories of the interior.

Decline in market prices for financial investments.

Losses related to fluctuations in the exchange rates

Example of a disclosure Q3 Sept 30, 2023

A listed Insurance company

Note 21. Subsequent Events

Subsequent to the date of the consolidated interim financial statements attached, during the month of October 2023, the Israeli war on the Gaza Strip erupted, resulting in significant destruction affecting all aspects of life. This led to damage in all business and economic activities in the Gaza Strip and the West Bank, accompanied by numerous market closures and movement restrictions between cities, resulting in the suspension of normal business activities. The company does not have operational activities or substantial assets in the Gaza Strip.

The Group's management has examined the exceptional circumstances that may have a material impact on the Group's operations and the risks associated with them. It concluded that the primary effects on the Group's profitability could arise from:

1. 
   

   Increased credit risks due to other contracting parties' inability to fulfill their contractual obligations to the Group, especially outstanding receivables and checks for collection from customers and agents.

   
   


2. 
   

   Decrease in total insurance premiums due to the non-renewal of periodic insurance documents.

   
   


3. 
   

   Decrease in the market value of the Group's held investments is due to market price fluctuations.

   
   


4. 
   

   Decline in the company's profitability due to fluctuations in foreign exchange rates, as most of the company's revenues, expenses, and provisions are denominated in the Shekel, which is the company's primary currency. 5. Decrease in the company's profits from subsidiaries due to expectations of declining business results for the same reasons

   
   

affecting the parent company.

The extent and duration of these effects on the Group's financial statements, remain unclear and depend on future developments that cannot be predicted at present. The Group's management will assess the magnitude of the effects that may result from the above-mentioned impacts when sufficient information becomes available.

Accounting estimates

The Auditor is required to assess Separately assess the inherent and control risk related to accounting estimates at the assertion level taking into account estimation uncertainty, complexity, subjectivity and other inherent risk factors

Identify all relevant estimates relating to the financial statements

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Risks Disclosure

Note - Risk Management

a. Liquidity risk: The Entity limits its liquidity risk by ensuring that bank facilities are available. Accounts payable are normally

settled within 30 days of the date of services/goods received.

b. Currency risk: The Entity is subject to fluctuations in foreign exchange rates in the normal course of its business. The entity did not undertake significant transactions in currencies other than NIS during the year.

c. Interest rate risk: Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in the market interest rates. The entity is subject to fluctuations in interest rates on its interest-bearing liabilities, including bank overdrafts and term loans.

d. Credit risk: Credit risk is the risk that one party will fail to discharge an obligation and will cause the other party to incur a financial loss. The entity seeks to manage its credit risk by monitoring outstanding receivables. At the date of the statement of financial position, no significant concentrations of credit risk were identified by management.

e. Other risk factors: The entity in Palestine and operates in a high risk political and economic area, which may increase the operational risk of the entity and, consequently, impact the operation in a negative manner.

War Impact on NGOs Sector

• Decline in donors funding, focus on emergency response

• More restrictions on signing new contracts with donors like EU and USAID.

Movement restrictions in West Bank, Jerusalem - also applies for business entities

• Delay in executing projects activities in WB and freezing in Gaza as well.

• Damage and loss of equipment/furniture owned and located in Gaza strip.