Most organisations are being impacted by the coronavirus (COVID-19) pandemic, either directly or indirectly, and the increased economic uncertainty and risk may have significant financial reporting implications.
The coronavirus (COVID-19) outbreak has caused significant deterioration in economic conditions for some organisations and an increase in economic uncertainty for others. Management needs to assess whether these events or conditions, either individually or collectively, cast significant doubt on the organisation’s ability to continue as a going concern and, in severe cases, whether the going concern assumption is still appropriate as a basis for the preparation of the financial statements.
When assessing an organisation's ability to continue as a going concern, management will need to consider the expected impact of the current economic uncertainty and market volatility caused by COVID-19.
Current events and conditions may have a significant impact on an organisation’s ability to continue as a going concern.
When assessing an organisation’s ability to continue as a going concern, management may need to do the following:
Yes, under Australian Accounting Standards, management are required to assess an organisation’s ability to continue as a going concern. Most organisations probably have never performed this analysis previously as this assumption was readily met based on historical, current and forecasted performance.
Given the uncertainty caused by the pandemic, it is likely that some organisations, in particular those in vulnerable industries, will have to model different scenarios before being able to conclude that the going assumption is appropriate. An organisation or entity is no longer a going concern if management either intends to liquidate the entity or cease trading, or have no realistic alternative but to do so.
Management may need to prepare an analysis of whether it will have sufficient liquidity to continue to meet its obligations as they fall due to support its going concern assessment if, for example, a number of the following indicators are present:
a. Revenue or profitability indicators
b. Funding and liquidity indicators
|You can expect your auditor to request more information regarding going concern than previously. They will start by assessing your cash flow forecasts, where the key judgements are: what sources you have used to derive the forecasts, and your plans for business continuation. Share what you have. Share updates as new information is gathered and assessed, which may be a live process up until signing.|
All relevant information available up to the date the financial statements are issued must be considered when assessing whether an organisation is a going concern. An entity should take into account all available information about the future, which generally is at least, but is not limited to, twelve months from the date the financial statements are issued.
Management assesses how the current events and conditions impact its operations, in particular, its revenue, expenses, funding and liquidity, with the key focus being whether it will have sufficient liquidity to continue to meet its obligations as they fall due.
When significant judgments were involved in concluding that the going concern assumption is appropriate and that there are no material uncertainties then a company should at a minimum, disclose:
When the entity is aware of material uncertainties related to events or conditions that may cast significant doubt upon its ability to continue as a going concern, additional information on the details of those uncertainties must be included in the financial report.
In our view, an explicit statement that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, and therefore that it may be unable to realise its assets and discharge its liabilities in the normal course of business should also be made.
An example of a possible going concern disclosure (in italics), including associated considerations (in [brackets]) is provided below.
COVID-19 and related measures to slow the spread of the virus have had a significant impact on the Australian and global economy, supply chains and financial markets, and resulted in increased levels of volatility and uncertainties. The effects of this health crisis are continuing to unfold and the ultimate extent of the economic impacts worldwide are unknown.
This information should be followed by a discussion of how the directors have concluded that the Group is a going concern. This could include information of their assumptions and inputs used in their modelling of cash flow forecasts and actions the organisation will be embarking to support the going concern assumption.
Illustrative example wording is provided below:
As of [insert date] 2020, the Group had net working capital [deficiency] of [$xxx], and undrawn capacity under its debt facilities of [$xxx] maturing in [insert details]. As of [balance date], the Group had capital commitments of [insert details].
The directors have prepared projected cash flow information for the [twelve months/longer] from the date of approval of these financial statements taking into consideration the estimation of the continued business impacts of COVID-19. In response to the uncertainty arising from this, the Directors have considered severe but plausible downside forecast scenarios.
These forecasts indicate that, taking account of reasonably possible downsides, the Group is expected to continue to operate, with headroom, within available cash levels and the terms of its debt facilities [or include details of expected risks of breaching terms]. Key to the forecasts are relevant assumptions regarding the business, business model, any legal or regulatory restrictions, financing and shareholder support, in particular: [insert details of scenarios and key assumptions made, the uncertainties attached to their execution, including any severe but plausible downside scenarios, such as:
The directors remain focused on the Group’s liquidity, and expect to manage business operations in the forecast period whilst maintaining adequate liquidity through the execution of:
Based on these forecasts, the directors believe that it remains appropriate to prepare the financial statements on a going concern basis and have a reasonable expectation that the Group’s [details of key covenants i.e. debt to equity ratio, interest cover ratio] will comply with the requirements of the debt facilities during the next twelve months.