The IFRS Foundation has published educational material to support companies in applying going concern requirements
IFRS Foundation publishes educational material on going concern
Companies preparing financial statements using IFRS Standards are required to assess their ability to continue as a going concern. In the current stressed economic environment arising from the COVID-19 pandemic, deciding whether the financial statements should be prepared on a going concern basis may involve a greater degree of judgement than usual.
To support companies, the IFRS Foundation has published educational material on going concern which brings together the requirements in IFRS Standards relevant for going concern assessments. The educational material is published to support consistent application of IFRS Standards and does not change, or add to, existing requirements.
Paragraph 26 of International Accounting Standard (IAS) 1 states that factors that management may need to consider when assessing whether the going concern basis of preparation is appropriate are those factors that relate to the entity’s current and expected profitability, the timing of repayment of existing financing facilities and potential sources of replacement financing.
In the current stressed economic environment, an entity may be affected by a wider range of factors than in the past. IAS 1 requires management to take into account all available information about the future. Therefore, management may need to consider this wider range of factors before it can conclude whether preparing financial statements on a going concern basis is appropriate. For instance, among the factors management may need to consider are the effects of any temporary shut-down or curtailment of the entity’s activities, possible restrictions on activities that might be imposed by governments in the future, the continuing availability of any government support and the effects of longer-term structural changes in the market (such as changes in customer behaviour).
Going concern requires a dynamic assessment to be made. Circumstances affecting management’s assessment of the entity’s ability to continue as a going concern might change rapidly in the current environment. Paragraph 14 of IAS 10 Events after the Reporting Period explains that management’s assessment of the use of a going concern basis of preparation needs to reflect the effect of events occurring after the end of the reporting period up to the date that the financial statements are authorised for issue.
Management’s decision will be underpinned by assumptions and judgements that, in the current environment, may involve more uncertainty than in the past. It is important therefore that an entity considers not only the specific disclosure requirements relating to going concern in paragraph 25 of IAS 1 but also the overarching disclosure requirements in IAS 1. These requirements include those in paragraph 122 relating to judgements that have the most significant effect on the amounts recognised in the financial statements.
The educational material also highlights different scenarios at different points of the going concern spectrum, including one where the entity concerned is no longer a going concern.