As we all have seen, the world has turned upside down in 2020. The coronavirus pandemic has affected businesses globally. This has an impact on the financial statements prepared under the International Financial Reporting Standards (IFRS).
The impact of COVID-19 can be summarised, at a high-level, into two categories:
- Going concern assessment
- Measurement of assets and liabilities
Here, we will focus on the Going concern assessment.
Going Concern is a fundamental accounting assumption when preparing financial statements. What this means is that the entity will continue to operate in the foreseeable future, at least for the next 12 months.
If it is determined that the entity is not a going concern then the basis of preparation of the financial statements, changes. This is because, for example, the assets will not realise their value through use in the business but through sale or disposal. The valuation therefore needs to be on a breakup basis rather than as a continuing business.
Both IAS 1 Presentation of Financial Statements and IAS 10 Events after the Reporting Period require a departure from the going concern basis when specific circumstances exist. The following are extracts from the Standards:
IAS 10 states “An entity shall not prepare its financial statements on a going concern basis if management determines after the reporting period date either that it intends to liquidate the entity or to cease trading, or that it has no realistic alternative but to do so”.
IAS 1 states “When an entity does not prepare financial statements on a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern”.
The responsibility for assessment of going concern is on the management.
Key considerations in Going Concern Assessment
When assessing the entity’s ability to continue as a going concern, the management needs to consider the current economic uncertainty and market volatility caused by the COVID-19 outbreak.
As part of the going concern assessment, an entity is required to demonstrate that it will continue to be in operation for the next 12-18 months. For this it requires sufficient liquidity or cash. The budgets and forecasts prepared in 2019 or earlier in 2020 will no longer be relevant, and will require significant revisions.
Given the uncertain environment as a result of COVID-19, an entity must consider multiple scenarios, including a severe downside scenario that is realistically possible. There are assumptions to be made about the length of the downturn. In some jurisdictions, the entities have access to government support and assistance, bank loans and debt restructuring. All of these, including any internal cost control measures taken, must be considered when assessing going concern.
In summary, the 2020 financial statements will require the management and finance teams to do more work to evidence that the entity is a going concern. The assessment of going concern requires use of judgements and estimates. It is one of the areas that the auditors will focus on this year and may lead to the material uncertainty related to going concern being a matter of emphasis in the independent auditors’ report.
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