Coronavirus has not changed the definition of, or responsibilities for, directors and auditors around going concern. An entity adopts the going concern basis of accounting unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. Disclosure is required of any material uncertainties which may cast significant doubt over the going concern status. This will require management judgement and then assessment by the external auditor or accountants.
Due to the effect of coronavirus on the ability for both directors and auditors to make assessments and draw conclusions around going concern, companies may want to consider deferring the approval and filing of their accounts until there is more certainty.
Management is responsible for assessing whether the entity is a going concern for at least 12 months from the date when the financial statements are authorised for issue. Forecasts should be prepared (and regularly updated as the situation evolves) to reflect potential scenarios and how management intends to deal with these.
The forecasts should take into account:
- the ability for staff to perform their jobs;
- the opportunity for clients or customers to continue to purchase goods or services;
- the capability of suppliers to continue to deliver necessary equipment and services; and
- the terms of the entity’s insurance policies including how long it might take for a pay-out.
Management’s going concern assessment should look at the existing and potential effects of coronavirus on the activities of the business. Where this results in there being material uncertainties around going concern these are required (under IFRS and UK GAAP) to be disclosed in the financial statements.
If, due to coronavirus, or any other events during or after the financial year-end, an entity can no longer be confident it is a going concern then it must not use the going concern basis of preparation and an alternative basis will be used. The directors must consider going concern up until the point of approval of the financial statements. For these reasons, in a rapidly changing environment, taking a breath and delaying approval should be considered.
The auditor must obtain sufficient appropriate audit evidence on the appropriateness of management’s use of the going concern basis of accounting and conclude (based on the audit evidence obtained) whether a material uncertainty exists about the entity’s ability to continue as a going concern.
The auditor cannot do this until management have performed their assessment. If management is unwilling to disclose material uncertainties, then the auditor will need to issue a modified auditor’s report. As the FRC have said, auditors need sufficient time to consider management’s assessment and obtain the requisite evidence. Therefore, companies may want to consider deferring the approval and filing of their accounts until there is more certainty.
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