The International Accounting Standards Board (IASB) has issued guidance on how to apply going concern judgments when finalising annual reports as covid-19 impacts revenue
In the current stressed economic environment arising from the covid-19 pandemic, many entities have seen a significant downturn in their revenue, profitability and hence liquidity which may raise questions about their ability to continue as a going concern. For such entities deciding whether financial statements are required to be prepared on a going concern basis may therefore involve a greater degree of judgment than usual.
When preparing financial statements, whether annual or interim, IAS 1 Presentation of Financial Statements, requires management to assess the entity’s ability to continue as a going concern. The standard defines going concern by explaining that financial statements are prepared on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so.
Paragraph 26 of IAS 1 states that factors that management may need to consider when assessing whether the going concern basis of preparation is appropriate are those factors that relate to the entity’s current and expected profitability, the timing of repayment of existing financing facilities and potential sources of replacement financing. In the current stressed economic environment, an entity may be affected by a wider range of factors than in the past.
IAS 1 requires management to take into account all available information about the future. Therefore, management may need to consider this wider range of factors before it can conclude whether preparing financial statements on a going concern basis is appropriate.
For instance, among the factors management may need to consider are the effects of any temporary shut-down or curtailment of the entity’s activities, possible restrictions on activities that might be imposed by governments in the future, the continuing availability of any government support and the effects of longer-term structural changes in the market (such as changes in customer behaviour).
When assessing whether to prepare financial statements on a going concern basis, IAS 1 requires management to look out at least 12 months from the end of the reporting period but emphasises that the outlook is not limited to 12 months.
Some national regulations require consideration of going concern for 12 months from the date that financial statements are authorised for issue. Considering time periods longer than 12 months is not inconsistent with the requirements in IAS 1, which establishes a minimum period, not a cap.