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 judgement and will be required to consider the impact of material uncertainties in assessing the entity’s ability to continue as a going concern. [ ]
Therefore, it is likely the impact of COVID-19 will put added pressure on entities to disclose in their financial statements information for users that is relevant and useful. In respect of the entity’s ability to continue as a going concern:
- significant judgements and estimates made in management’s assessment
- any material uncertainties in existence
- management’s plans to address the material uncertainties that exist.
Financial reporting requirements
IAS 1 contains guidance related to the going concern assumption and outlines when financial statements are prepared on the assumption the entity will continue as a going concern. IAS 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 entity’s future. Management should consider a wide range of factors, such as: current and expected profitability, debt repayment schedules and potential sources of replacement financing and the ability to continue providing services. If management concludes that the entity may be liquidated (either by choice or because it has no realistic alternative but to do so), the going concern assumption would not be appropriate and the financial statements may have to be prepared on another basis, such as a liquidation basis. If there is material uncertainty about the entity’s ability to continue as a going concern, the entity should include going concern disclosure in the notes to its financial statements.
Significant judgements and sources of estimation uncertainty
In addition to the above-required disclosures for going concern, disclosures for significant judgement and sources of estimation and uncertainty are also relevant.
IAS 1 requires that when significant judgement has been involved in concluding whether or not there are material uncertainties that cast significant doubt upon an entity’s ability to continue as a going concern, these judgements should be disclosed. This includes judgements where entities conclude:
- that there are significant uncertainties that cast doubt over the entities ability to continue as a going concern, but the entity has ultimately determined that financial statements should be prepared on a going concern basis
- there are no material uncertainties related to events or conditions that cast significant doubt over the entities ability to continue as a going concern.
Sources of estimation uncertainty
IAS 1 also requires disclosure of sources of estimation uncertainties. This involves disclosing information about the assumptions it 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.
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 judgements and assumptions made as part of whether the going concern assumption is appropriate.
How Grant Thornton can help
Preparers of financial statements will need to be agile and responsive as the situation unfolds. Having access to experts, insights and accurate information as quickly as possible is critical – but your resources may be stretched at this time. We can support you as you navigate through accounting for the impacts of COVID-19 on your business. Now more than ever the need for businesses, their auditor and any other accounting advisors to work closely together is essential. In this article is general information, not specific advice. However, if you would like to discuss any of the points raised, please speak to your usual Grant Thornton contact or your local member firm.