During the boom years it was generally assumed that companies would continue trading. Now, however, things have changed and for many companies there is some doubt as to whether they will viable going forward. These doubts may arise due to trading issues, bank funding difficulties or other issues. Whether or not a company can be considered as a going concern relates to whether or not a company is expected be in existence in the foreseeable future1.
The purpose of this Bulletin is to remind directors of their responsibilities with regard to going concern.
The decision as to whether or not a company can continue as a going concern is one which is the responsibility of directors, and not the accountant or auditor. Hence directors need to make their own assessment and base it on reasonable conclusions.
Directors are required under accounting standards to:
a) Make an assessment of the company’s ability to continue as a going concern; and
b) To ensure, if there are uncertainties in relation to a company’s ability to continue as a going concern these are adequately disclosed in the financial statements.
Examples of possible events or conditions that may cast doubt on the entity’s ability to continue as a going concern are: your company is in breach of loan covenants so there is a risk facilities may be withdrawn or your customers are taking longer to pay or some of your key suppliers are in difficulty.
A more comprehensive list is available in Appendix 2 of the document “Going Concern Issues During The Current Economic Conditions”2
Going concern basis, what does it mean?
Regardless of whether a company is subject to audit, a company’s financial statements are required to give a “true and fair view” of the financial health of the company. In order to give a true and fair view the financial statements need to be prepared on an appropriate basis. This means an assessment needs to be carried out as to whether or not the company will be around in the foreseeable future. If the decision is that it will not be the accounts should not be prepared on a going concern basis.
When the company is considered to be a going concern the financial statements are prepared on a going concern basis. If the company is not considered a going concern the financial statements are prepared on a break-up basis.
Examples of when financial statements should not be prepared on a going concern basis (but should be prepared on a “Break –up basis” are:
When a company has either the necessity or intention to:
Areas for consideration in making an assessment
The importance of the areas above will vary from company to company when assessing going concern and this is not an exhaustive list.
Outcomes which Directors may reach upon completing their assessment:
1. No material uncertainties around the entity’s ability to continue as a going concern i.e. there is no doubt that the company will be around for the foreseeable future.
Action: Accounts are prepared on a going concern basis and no additional disclosures are required
2. There are material uncertainties i.e. there is significant doubt around the entity’s ability to continue as a going concern.
Action: Adequate disclosures will be required in the accounts describing any material uncertainties.
3. It is not appropriate to prepare the accounts on a going concern basis i.e. the directors are of the opinion that the company will NOT be in existence for the foreseeable future.
Action: The accounts should be prepared on a break up basis.
1. Apply an appropriate degree of rigour and formality when making their judgments.
Appropriate and adequate procedures need to be in place and followed to determine whether your business will be viable going forward.
2. Plan your assessment as early as possible (including what information you may need to make your assessment)
Having early discussions with your auditor/ accountant is important.
In the case of audited financial statements, early discussions may reduce the risk of your auditor having to qualify your financial statements as a result of not being able to gather information required to support your decision to prepare the financial statements on a going concern basis.
In the case of financial statements not subject to audit this will allow for early identification of what type of information you may need to compile in order to give a “true and fair view”.
3. Draft Disclosures early (where disclosures are required)
In the case of audited accounts this will allow the auditor to plan what audit work they need to do to be satisfied with your assessment. In the case of unaudited accounts you can discuss disclosures with your accountant to ensure they give a “true and fair view”.
It will also allow for appropriate action plan to be put in place where one is needed. The details of this action plan may form part of your disclosure.
4. Take account of subsequent developments
Final assessments of going concern need to be made at the date that the directors approve the financial statements, and not just at the financial reporting date/ year end date. This means that any relevant facts and circumstances which arise between the financial reporting date/ year end date and date of signing of the accounts must be taken into account and if necessary factored in.
So what does all this mean for Directors and the financial statements?
A] The Directors’ Report needs to include disclosure of principal risks and uncertainties in the business review to be included in the Directors’ Report.
B] Additional disclosures may be required relating to both going concern and liquidity risk arising from changes to accounting standards.
C] Cashflow squeeze may give rise to liquidity risk being a material risk for some entities. If this is a problem for your company, the relevant disclosures need to be included in the financial statements. Your accountant can advise you regarding the required disclosures.
The process by which these disclosures are prepared will be assessed by auditors where relevant when looking at the validity of the going concern assumption.
1The foreseeable future is defined under International Financial Reporting Standards (IAS 1) as being at least but not limited to twelve months from the end of the reporting period. Under Irish GAAP (FRS 18) disclosure is required if the period under consideration is less than 12 months from the date of approval of the financial statements.
2This document is available form the Auditing Practices Board website (www.frc.org.uk/apb) in the publications section