In this 4-part series, the MMS Group is covering how to deal with Covid-19 in the context of going concern. In part I, we explained the meaning of going concern and what factors Management should consider in assessing the ability of an entity to continue as such. In part II, we will be dealing with the application of the requirements in IAS 1, specifically the basis upon which financial statements as a key deliverable in the financial auditing process should be prepared.

Application of IAS1 requirements

The application of IAS 1 can best be explained with reference to the table below. The table deals with a situation of deteriorating entity performance on a scale of A to D and offers guidance on when additional or specific disclosures would trigger.

Disclosure is key

Although the decision to prepare financial statements on the going concern basis is a “yes/no” decision, the circumstances underlying the decision will vary from entity to entity. In the current environment, the assumptions and judgements applied by Management in arriving at their decision as to the basis of financial statement preparation, are likely to bear a higher level of uncertainty than is the norm. Preparers of financial statements will need to be mindful of the specific disclosure requirements relating to going concern in para 25 of IAS 1, as well as the underlying disclosure requirements of IAS 1 and consider the perspective of the financial statement user. Judgements that have the most significant effect on amounts recognized in the financial statements are especially relevant and will need to be disclosed.

In our next blog on this financial auditing subject, we will elaborate further on the basis of preparation and deal with the scenario where an entity is no longer judged to be a going concern.  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.