ICAS issues guidance on going concern for directors of large private companies
ICAS has issued guidance to assist directors of large private companies in their assessment of whether use of the going concern concept of accounting is appropriate when preparing financial statements.
ICAS has issued guidance to assist directors of large private companies in their assessment of whether use of the going concern concept of accounting is appropriate when preparing financial statements. It may also be helpful for directors of medium-sized companies and smaller listed entities. The guidance complements the joint guidance on going concern with ICAEW targeted at the directors of SMEs.
The impact of Covid-19 will vary from business to business but there will be few that are not affected whether directly or indirectly. Consideration of the impact is very likely to form part of the directors’ assessment when preparing their strategic reports and financial statements. This guidance highlights useful existing guidance and certain specific Covid-19 related factors that directors may need to consider.
Directors should consider the specific facts and circumstances of their company in determining the extent of the procedures to be undertaken when forming the going concern assessment, whilst being cognisant of wider macroeconomic conditions. The quality of the disclosures made by the directors in the financial statements and the underlying supporting evidence will be key when the auditor considers the opinion that they will issue on the financial statements.
The guidance covers the following factors that are likely to require consideration in forming the going concern assessment:
(i)Macroeconomic conditions;
(ii)The impact on business operations;
(iii)Forecasting, including stress testing; and
(iv)Potential actions to mitigate risk.
No-one yet knows the full impact of Covid-19 and there are currently unprecedented levels of uncertainty. Appropriate exercise of professional judgement by directors and auditors will be required to provide much needed information to users on the financial performance and position of companies. That information can only be based on that which is available up to the date at which the financial statements are authorised for issue. Directors may find the ICAS professional judgement framework for financial reporting helpful when forming their assessment on going concern and in relation to other accounting matters.
Reporting needs to be tailored to the company, and should provide useful information about the impact of Covid-19 on the company to users. As the Financial Reporting Council have stated:
“In the absence of any consensus view of the future path of the Covid-19 pandemic and its impact on the economy, users cannot expect all companies to apply consistent assumptions when there is such uncertainty. This lack of consistency makes the need for full disclosure of judgements, assumptions and sensitive estimates significantly more important than usual”
That directors prepare financial statements on a going concern basis is not intended to and does not guarantee that a company will continue in existence for at least 12 months from the date at which the financial statements are approved for issue. Additionally, doubts about the ability of a company to remain as a going concern do not necessarily mean that the company is, or is likely to become, insolvent.
Ultimately, directors should place their emphasis on the importance of telling the story of the company. They should set out the key information sources, judgments and assumptions as at the date of making the assessment.