In our 4-part financial auditing blog series on going concern, we are discussing the potential impact of Covid-19 within the context of going concern. Parts I and II covered an explanation of going concern, the factors that management should consider in assessing the ability of an entity to continue as a going concern, and ultimately how to apply the requirements of IAS 1.
In this blog, part III in the series that affects our financial auditing considerations, we are furthering the discussion on the basis of financial statement preparation in the case of entities trading profitably versus those where this is not the case. We will also be dealing with the scenario where an entity is no longer assessed by Management to be a going concern.
Determining the basis of financial statement preparation
- Save towards your retirement
- Entity not trading profitably:
- Where an entity is borderline ceasing to be a going concern, the entity is likely to be operating at a loss, it is experiencing loss or declining demand for its goods or services, with funding facilities expiring within a period of 12 months. Management is likely to have developed and already implemented action plans and mitigating strategies and these are proving to be successful. In addition, alternative sources of funding have been identified and are likely to be converted. Based on these outcomes attained, the extent of uncertainty is reduced and, as a result, Management may assess that the entity is in fact a going concern. In this case, the financial statements would still be prepared on a going concern basis and would include disclosure of the judgements made in concluding that no material uncertainties remain.
- Similar to the 2nd scenario discussed above, an entity could find itself in a situation of not yet having tested its turnaround strategy and, as a result, has little or no certainty of the likely efficacy of the mitigating actions. Notwithstanding this, Management has considered all relevant information such as planned turnaround strategy, etc and determines that despite the material uncertainties that prevail, the financial statements be prepared on a going concern basis. In this case, the financial statements would be prepared on a going concern basis, but more onerous disclosures are required, including:
- Details of prevailing uncertainties.
- Details of significant judgements applied.
- Where an entity that is not trading profitably has no reasonable alternative other than to commence liquidation or to cease trading, the going concern basis of financial statement preparation is not appropriate. IAS 1 does not prescribe an alternative basis, this would be a management decision based on the specific circumstances that prevail at the time. Disclosure would be required of the basis applied, clarifying that the going concern basis has not been utilized.
Is Your Business At Risk For Online Fraud?While business executives frequently assess risks that could impact their enterprises, one they often overlook is the potential threat of...
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...
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...