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Going Concern Jan2021

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Going Concern Jan2021 January 2021 Going concern—a focus on disclosure This document is intended to support the consistent application of requirements in IFRS® Standards A fundamental decision management has to Paragraph 26 of IAS 1 states that factors that make in preparing financial statements applying management may need to consider when assessing IFRS Standards is whether to prepare them on a going whether the going concern basis of preparation concern basis. In the current stressed economic is appropriate are those factors that relate to the environment arising from the covid-19 pandemic, entity’s current and expected profitability, the timing many entities have seen a significant downturn in of repayment of existing financing facilities and their revenue, profitability and hence liquidity which potential sources of replacement financing. In the may raise questions about their ability to continue as current stressed economic environment, an entity a going concern. For such entities deciding whether may be affected by a wider range of factors than in financial statements are required to be prepared on a the past. IAS 1 requires management to take into going concern basis may therefore involve a greater account all available information about the future. degree of judgement than is usual. Therefore, management may need to consider this wider range of factors before it can conclude whether Most stakeholders are familiar with the specific preparing financial statements on a going concern discussion of going concern and related requirements basis is appropriate. For instance, among the factors in IAS 1 Presentation of Financial Statements to disclose management may need to consider are the effects material uncertainties relating to an entity’s ability of any temporary shut-down or curtailment of the to continue as a going concern. However, questions entity’s activities, possible restrictions on activities raised about going concern in recent months have that might be imposed by governments in the future, highlighted the relevance of other ‘overarching’ the continuing availability of any government support disclosure requirements in IAS 1 that interact with and the effects of longer-term structural changes in the specific going concern requirements. Considering the market (such as changes in customer behaviour). this interaction is an important step in identifying material disclosures required by IFRS Standards; When assessing whether to prepare financial those disclosures are likely to be relevant for users of statements on a going concern basis, IAS 1 requires financial statements. One aspect of this interaction management to look out at least 12 months from the was highlighted in a 2014 Agenda Decision published end of the reporting period—but emphasises that the by the IFRS Interpretations Committee. This document outlook is not limited to 12 months. Some national not only recaps the content of that agenda decision regulations require consideration of going concern but also highlights other possible interactions that for 12 months from the date that financial statements might be relevant. are authorised for issue. Considering time periods longer than 12 months is not inconsistent with the Assessing going concern requirements in IAS 1, which establishes a minimum When preparing financial statements, whether annual period, not a cap. or interim, IAS 1 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. Going concern—a focus on disclosure | January 2021 | 1 A dynamic assessment The circumstances could range from when an entity Circumstances affecting management’s assessment is profitable and has no liquidity concerns to when of the entity’s ability to continue as a going concern it is a ‘close call’ to prepare the financial statements might change rapidly in the current environment. on a going concern basis, even after considering Paragraph 14 of IAS 10 Events after the Reporting Period any mitigating actions planned by management. explains that management’s assessment of the use of Management’s decision will be underpinned by a going concern basis of preparation needs to reflect assumptions and judgements that, in the current the effect of events occurring after the end of the environment, may involve more uncertainty than reporting period up to the date that the financial in the past. It is important therefore that an entity statements are authorised for issue. This might considers not only the specific disclosure requirements require management to update assessments of the relating to going concern in paragraph 25 of IAS 1 going concern basis of preparation and decisions but also the overarching disclosure requirements about which disclosures are necessary. If, before in IAS 1. These requirements include those in the financial statements are authorised for issue, paragraph 122 relating to judgements that have the circumstances were to deteriorate so that management most significant effect on the amounts recognised no longer has any realistic alternative but to cease in the financial statements. In the current stressed trading, the financial statements must not be prepared economic environment, users of financial statements on a going concern basis. are more likely to focus on disclosures relating to Disclosure is key going concern. Questions that users might ask could Whether or not to prepare financial statements on include how the assumptions management has used a going concern basis is a binary decision, but the in reaching its conclusion about going concern relate circumstances in which entities prepare financial to assumptions underpinning other aspects of the statements on a going concern basis will vary widely. financial statements. Applying the requirements in IAS 1 The requirements in IAS 1 can be depicted as set out in the diagram below: ... entity situation deteriorating ... No significant Significant doubts Significant doubts Intends to doubts about going about going concern about going concern liquidate or to concern but mitigating actions but mitigating actions cease trading, or no judged sufficient to judged sufficient to realistic alternative make going concern make going concern but to do so Scenario appropriate appropriate Material Entity determines no uncertainties about material uncertainties going concern remain after considering mitigating actions Basis of Alternate basis Going concern preparation (not going concern) Basis of preparation Basis of preparation Basis of preparation Limited specific No specific disclosures Significant Material uncertainties requirements Disclosure judgements? Significant judgements? Going concern—a focus on disclosure | January 2021 | 2 Applying the requirements in IAS 1 about (a) the events or conditions that cast significant continued ... doubt upon the entity’s ability to continue as a going concern and (b) the feasibility and effectiveness of At one end of the going concern range, in Scenario 1, management’s actions or plans in response to those is an entity that has profitable operations and has events or conditions. no liquidity concerns and for which there are no significant doubts about its ability to continue as a Now consider Scenario 2. Assume that the facts are going concern. For such an entity, apart from the need similar to Scenario 3 except that after considering to describe the basis of preparation, there are no specific the feasibility and effectiveness of the actions it disclosure requirements relating to going concern. plans, management concludes that the material It is also less likely that significant judgements were uncertainties are expected to be mitigated—for involved in reaching the conclusion to prepare the example, management might have started executing financial statements on a going concern basis. a turnaround strategy that is showing sufficient evidence of success including identifying feasible At the other end of the going concern range, in alternative sources of financing. The Interpretations Scenario 3, is an entity that is close to ceasing to be Committee considered a similar scenario in 2014. In a going concern. Assume the entity is loss-making, its Agenda Decision the Committee highlights that demand for its goods or services has decreased rapidly if, after considering planned mitigating actions, and its funding facilities are due to expire in the management’s conclusion that there are no material next 12 months. In this scenario, management has uncertainties involves significant judgement, then concluded after considering all relevant information— the disclosure requirements in paragraph 122 would including the feasibility and effectiveness of the apply to the judgements made in concluding that no actions it plans to take—that preparing the financial material uncertainties remain. statements on a going concern basis is appropriate. Nonetheless, management concludes there are Another example of overarching disclosure material uncertainties relating to events or conditions requirements in IAS 1 that could also be relevant, that may cast significant doubt upon the entity’s especially in cases of close calls, are the requirements ability to continue as a going concern—for example, relating to sources of estimation uncertainty in there might be considerable uncertainty about paragraphs
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