Reading Time: 4 minutes

One of the most important decisions that need to be taken under IFRS during the process of preparation of financial statements of an entity and ahead of the financial auditing process, is whether to prepare these on a going concern basis. The impact of Covid-19 on the wellbeing of many businesses during the past 12 months has seen many businesses’ revenues decline sharply, diminished profitability and distressed liquidity. These indicators are raising questions about the ability of many entities to continue as a going concern, rendering this an increasing area of risk in the financial auditing process.

Given the significant impact that this will potentially have on the preparation of entities with 28 February financial year ends, the MMS Group has dedicated a 4-part blog series this month, to dealing with the going concern dilemma against the backdrop of Covid-19. In this, the first in the series, we explain the background and considerations to apply in making the going concern assessment.

3-March Blog

Background

Most stakeholders and preparers of financial statements are aware of the requirements contained in IAS 1 Presentation of Financial Statements to disclose material uncertainties relating to an entity’s ability to continue as a going concern. Questions in recent months have, however, served to highlight the relevance of other underlying disclosure requirements in IAS 1 interacting with the specific going concern requirements.

Assessing Going Concern

Whether for annual or interim purposes, IAS 1 requires management to perform an assessment of the entity’s ability to continue as a going concern. Unless there is an intention to liquidate the entity in question, or to cease trading, or there is no realistic alternative to either scenario, the financial statements would be prepared on a going concern basis. In para 26 of IAS 1, the factors management should consider are set out as:
  • Current and expected future profitability.
  • Timing and repayment of existing financing facilities
  • Potential sources of replacement funding, if required.
  • All other factors other than those given above and known to management.
In the current economic climate, the 4th bullet above is particularly significant. Management would need to further consider factors such as:
  • The impact of any further adjustment to the current lockdown levels.
  • Potential restrictions on business that may be imposed, as a consequence of amendments to the rules of trade under any of the existing lockdown levels.
  • Any further Government support available or likely to be made available.
  • Long term effects of structural market changes (such as changes in customer behaviour).

In our next blog on this subject, we will explore how the requirements of IAS 1 should be applied.  Reach out to our financial auditing team for advice on how to deal with events after the reporting date in your entity financial statements. 

The material in this blog post has been prepared with reference to “Going concern – a focus on disclosure” issued by SAICA, January 2021, to support the consistent application of requirements in IFRS® Standards.

Related Articles

Why a Trust?

The popularity of trusts has generally decreased in business, due to the tightening of tax provisions around trusts, reducing their effectiveness as a vehicle to legitimately reduce...

10 Steps to understanding Trusts in SA

Increasingly, individuals are appreciating the value of trusts in estate planning. Thanks to the continued growth in these vehicles, we offer dedicated trust accounting services to our...

Subordination agreements, Covid & SARS

Many businesses in South Africa are finding themselves faced with liquidity pressures as a result of Covid-19 and the lockdown. The inability to trade for several months has translated...

If you found this information helpful, contact us now for help with your specific needs