Covid-19 Going Concern Considerations

Covid-19 and the South African lockdown has affected all industries across South Africa, casting doubt as to whether many businesses will continue operating successfully, if at all. Businesses that were unable to trade for prolonged periods faced extreme financial difficulties. As auditors, the profession as a whole will be under scrutiny to ensure that our audit opinions following the impact of this global pandemic are appropriate, given the increased risk of businesses potentially failing to meet the definition of a going concern.

Under IFRS® standards, management is responsible for assessing the company’s ability to continue functioning as a going concern. Management therefore is required to assess whether a company will continue in operation for the foreseeable future (of at least 12 months) and be able to meet its debts as they fall due. If this going concern assumption is no longer appropriate, this gives rise to an adjusting event under IFRS.

1. Revising budgets and forecasts
   2020 budgets prepared in 2019 are unlikely to be attainable, let alone realistic or relevant and may therefore require significant revision. One would need to revise predictions of sales and gross margins, particularly in light of supply chains that have been negatively impacted. Review working capital estimates, ensuring sufficient levels of liquidity will remain in the business month-to-month. Management will need to assess different scenarios, assign probabilities and consider the outcome of these against financial covenants. Ultimately, the management team will need to evaluate whether the company will have sufficient liquidity to meet its financial commitments as they fall due.
2. Borrowings
   Businesses that are funded by significant borrowings and reliant on further debt to support business growth will need to evaluate their likely credit ratings, since interest rates will be less attractive for businesses in weaker credit status. Expect lenders to demand new terms and impose more stringent covenants. Consider that foreign denominated debt will be negatively impacted by a weakening Rand.
3. Disclosures
   Where events and conditions are identified that impact on a company’s ability to continue as a going concern, these uncertainties must be disclosed. Similarly, where no material uncertainties are identified, this too must be disclosed.
   
   Depending on your particular circumstances, there will be further considerations. If there are concerns regarding going concern for your enterprise, we encourage reaching out to your audit services contact at MMS to discuss how best management can approach this process and ensure that you have considered all appropriate aspects of the business in assessing its going concern status. Our audit services team may also be reached by visiting https://www.mmsgroup.co.za/auditing/.

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