In today’s fast-changing environment, companies must focus on increasing their agility and building resilience to mitigate the effects of the ongoing pandemic, whilst continuing to undertake all necessary duties and responsibilities.
One such responsibility of the Directors is to carry out detailed and demonstrable assessments to ascertain whether your company or companies are a ‘going concern’. Such underlying assumptions appear during the preparation of financial statements. They assume that the entity neither has the intention nor the need to liquidate or curtail the scale of its operations materially. This assumption covers at least 12 months from the date on which the accounts are signed-off by the Directors and approved for issue.
As the future remains uncertain, the ICAEW has published a detailed guide to the treatment of going concern. Against the ongoing backdrop of COVID-19, Directors may now reach very different conclusions than would have been garnered prior to the pandemic – something which may be particularly relevant for those industries which have been adversely affected, such as hospitality and travel.
Going concern assessments developed before the outbreak, or in its early stages, are likely to be no longer fit for purpose and will need revisiting. For example, an entity with a year-end in late 2019 or early 2020 may have been a going concern at its balance sheet date. However, this position may have changed after the reporting period date due to the actual or potential impact of the Coronavirus.
If the entity is no longer a going concern, and the financial statements have not yet been authorised for issue, then the basis upon which the going concern was assumed would no longer be appropriate. It is therefore crucial that Directors review the going concern status of the business up until the point at which the financial statements are authorised for issue.
During audits, we must be convinced that the business is operating as a going concern, something which may cause difficulty in the current climate. If you are unable to demonstrate such an assumption, then our audit report would require qualifying.
We are hearing increasing reports of clients who are facing issues with their credit insurance. For obvious reasons, insurers are analysing and scrutinising a company’s financials, and, in a few cases, cover has been withdrawn due to issues with a qualified report.
ICAEW’s guide to COVID-19 and going concern can be found here.
To discuss this in more detail, please liaise with your Champion advisor.
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