IASB Issues Reporting Guidance related to Going Concern through IFRS Foundation

Friday, February 12, 2021 Print Email

The International Accounting Standards Board (IASB) recently issued guidance (through IFRS Foundation) regarding applying going concern judgments when preparing and finalizing financial statements, in light of the current volatile economic and financial conditions.

This move comes as the uncertain business environment caused by the COVID-19 outbreak together with disruption due to Brexit, shifted focus of most of the business world on viability of businesses while adding a layer of complexity around going concern assessments for companies having year-ends in late 2020 or early 2021.

All the stakeholders of various business entities are increasingly concerned with regards to the impact of reduced revenue and profits due to the ongoing pandemic and this has increased the value of going concern assessments and related disclosures, as per the recently issued guidance by the IASB. 

When a company prepares its financials, whether interim or annual, IAS 1 Presentation of Financial Statements, requires the company’s management to assess its ability to continue its business operations in the long-run. The said standard defines going concern by explaining that a business entity prepares its financial statements on a going concern basis unless its management intends either to cease trading or liquidate the entity or, or simply has no other option but to do so.

Paragraph 26 of IAS 1 clearly states the factors that management of an entity may need to take into account when evaluating whether it is appropriate for it to prepare its financials on a going concern basis. These are those factors that mainly relate to the entity’s existing and future profitability, the timing of payment of current financing facilities as well as potential future financing sources. However, it can be said that considering the current financial and business conditions, a business entity may be impacted by a wider range of factors than in the past.

The aforementioned standard also requires an entity to take into consideration all the available information regarding the future when assessing whether it can continue as a going concern. Therefore, it can be said that management of an entity may need to consider all the factors mentioned above and a lot more before it can conclude whether it is appropriate for it to prepare its financials on a going concern basis.

For example, among the factors an entity may need to evaluate may include the impact of any temporary shut-down or reduction in business operations/ activities, potential restrictions on business activities/ operations that may be imposed by governments in the future, the availability of continued support by the government and the impact of long-term structural changes in the market (such as change in supplier/ customer behaviour).

When examining whether financials are to be prepared on a going concern basis, IAS 1 requires the entity’s management to take into account at least 12 months from the reporting period end but also puts emphasis that the outlook is not limited to the aforementioned period.

The link of the going concern related guidance is as follows:

IASB Going concern - a focus on disclosure

Source: Ready Ratios

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