COVID-19 Going Concern Considerations
This Accounting Alert is issued to provide guidance in improving disclosures on going concern.
The impact of COVID-19 is expected to have a significant impact on the going concern assumption for a large number of entities. Some entities which were previously a going concern may no longer be. Many entities will need to apply significant judgment and will be required to consider the impact of material uncertainties in assessing the entity's ability to continue as a going concern.
Financial reporting requirements
PAS 1, Presentation of Financial Statements, explicitly states that at each reporting date, management is required to assess the entity's ability to continue as going concern and consider all available information about the entity's future.
The following disclosures are also relevant:
- Significant judgments and estimates made in management's assessment
These include judgment where entities conclude that there are significant uncertainties that cast doubt over the entity's ability to continue as a going concern, but the entity has ultimately determined that financial statements should be prepared on a going concern basis and; there are no material uncertainties related to events or conditions that cast significant doubt over the entities ability to continue as a going concern.
- Any material uncertainties in existence and management's plan to address the uncertainties
These involve disclosing information about the assumptions an entity makes about the future, and other major sources of estimation uncertainty at the end of the reporting period. In respect of the going concern assessment, this is disclosing those amounts that could potentially result in a material adjustment to the carrying values of assets and liabilities within the next financial period. Entities should disclose, in relation to those assets and liabilities, details of their nature and their carrying amount at the end of the reporting period.
Period of assessment
PAS 1 explicitly states that at each reporting date, management is required to assess the entity’s ability to continue as a going concern and consider all available information about the future, which is at least, but is not limited to, twelve months from the annual reporting date. Even if events during the subsequent events period are not considered adjusting subsequent events, they should still be incorporated into the going concern assessment.
Accounting vs. auditing standards
While the auditing standards are specific in required disclosures where there are events or conditions that may cast doubt on the entity’s ability to continue as a going concern, the accounting standards are not specific. There is therefore judgment involved in how an auditor concludes that the disclosures in relation to going concern are adequate, particularly when the assessment involves significant judgment or material uncertainties. We therefore recommend engaging with the auditor soon after the commencement of the audit.
A key component of assessing going concern is to report all the material uncertainties that exist at the date of approval of the financial statements in a clear and concise way. We recommend building going concern disclosures which provide information about events and conditions that cast doubt over the entities' ability to continue as a going concern, even if the entity has concluded the going concern basis is still appropriate. This includes disclosing judgments and assumptions made as part of whether the going concern assumption is appropriate.
See attached Accounting Alert for further details.