The ongoing impact of the COVID-19 pandemic continues to pose an unprecedented amount of financial pressure on many businesses and increase in economic uncertainty for others. Nearly two years into this pandemic, economic forecasts suggest that some pressures are likely expected to ease along with the initial steps taken towards economic recovery. As we near the end of the calendar year, management of companies will have to re-assess how these economic conditions affect companies’ ability to continue as a going concern. Auditors, on the other hand, will have to practice enhanced professional skepticism in validating management’s representations on whether companies are indeed out of the woods or are still caught up in the downturn brought by the pandemic. Disclosures regarding going concern will be of utmost importance in providing transparent and relevant information to users of financial statements.
One of the fundamental principles of accounting is the going concern assumption. Going concern views an entity as continuing in business for the foreseeable future unless management has an intention or is expected to be forced to cease operations and liquidate its assets. When the use of the going concern assumption is appropriate, revenues and expenses are recognized on accrual basis while assets and liabilities are expected to be realized and discharged, respectively, in the normal course of business.
Under the Philippine Accounting Standard (PAS) 1, Presentation of Financial Statements, management shall make an assessment of an entity’s ability to continue as a going concern when preparing financial statements. Disclosures would include material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern (which management is aware of in making its assessment) and the judgment that management has made in concluding the absence of these material uncertainties. When an entity does not prepare financial statements on a going concern basis, it shall also disclose the reason thereof, and the basis on which the financial statements are prepared.
Management must 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 period are not considered adjusting subsequent events, they should still be incorporated into the going concern assessment. But what are the considerations that management must keep an eye on to arrive at an appropriate assessment?
According to the Philippine Standard on Auditing (PSA) 570, Going Concern, management’s assessment of the entity’s ability to continue as a going concern involves making a judgment, at a particular point in time, about the future outcome of events or conditions which are inherently uncertain. The standard also cited the following factors to be relevant in arriving at this judgment:
- The degree of uncertainty associated with the outcome of an event or condition increases significantly further into the future when a judgment is made about the outcome of an event or condition. For that reason, most financial reporting frameworks that require an explicit management assessment specify the period for which management is required to take into account all available information.
- The size and complexity of the entity, the nature and condition of its business, and the degree to which it is affected by external factors all affect the judgment regarding the outcome of events or conditions.
- Any judgment about the future is based on information available at the time at which the judgment is made. Subsequent events may be inconsistent with a judgment which was reasonable at the time it was made.
Auditors, likewise, are mandated by professional standards to obtain sufficient appropriate audit evidence regarding management’s use of the going concern basis of accounting in the preparation of the financial statements and to conclude whether a material uncertainty exists about the entity’s ability to continue as a going concern. Situations where management may be overly optimistic as to future outcome are paid particular attention.
Going concern is not an instinct-based concept, but rather, an assumption that is backed by facts within reach. All available information about the future is taken into account with careful consideration of events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. At present, the assessment may involve a little more thorough evaluation than the usual examination of budgets and commitments. It may entail preparers of financial statements to be alert and keen on analyzing the impact of changing economic conditions. Businesses working closely together with its accounting advisors and auditors will be essential in ensuring that adequate disclosures are included in the financial statements.
As published in Mindanao Times, dated 19 November 2021