Accounts Steering Group: A guide to going concern

In this guide we summarise a company’s responsibility for assessing going concern and the associated practical implications for financial reporting, in light of the coronavirus pandemic. The guide is aimed primarily at entities preparing accounts in accordance with FRS 102 but includes considerations that can be broadly applied to all entities.

While small entities applying Section 1A of FRS 102 are not required to provide going concern disclosures, they are encouraged to disclose material uncertainties that might affect the entity’s ability to continue as a going concern. Furthermore, Section 1A accounts must give a true and fair view. Judgement will therefore be required to decide whether further disclosures, over and above those specifically required by Section 1A of FRS 102, will be needed in order for the accounts to give a true and fair view.

What are management’s responsibilities in relation to going concern? 

Management are required to carry out an assessment to ascertain whether the entity is a going concern. The assessment should take into account all available information about the future, which is at least, but is not limited to, 12 months from the date when the financial statements are authorised for issue. There are no set procedures required for a going concern assessment. The approach generally depends upon the business, its size, complexity and history of profitable operations. Typically, management focuses on liquidity (i.e. availability of cash for the business to pay its way over the coming months) and performance.

If, having completed the assessment, management conclude that there are material uncertainties related to events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties must be disclosed. Uncertainties are considered material if their disclosure could reasonably be expected to affect the economic decisions of shareholders and other users of the financial statements.

If management conclude that the entity is not a going concern, the financial statements should not be prepared on the going concern basis.

What should a company consider when carrying out the going concern assessment?  

There are no set procedures for a going concern assessment. However, the availability of cash is central to an entity’s survival and management will typically consider cash flow forecasts to be a key component of their assessment.

When looking at this management need to consider; the impact of performance, working capital requirements, access to finance and investing.

It is also important that these forecasts are stress tested to show the effect of outside influences such as Covid-19, Brexit and the ongoing dispute in Ukraine.

In conducting the going concern assessment, it will be important to capture and document thought processes and assumptions made in sufficient detail. This documentation will be needed as support for associated disclosures.

What are the implications of the going concern assessment on financial reporting?

The implications for financial reporting will depend on the outcome of the going concern assessment and whether management conclude that the entity is a going concern; that there are material uncertainties about the entity’s ability to continue as a going concern; or that the entity is not a going concern.

In all cases, openness and transparency are paramount considerations. Providing clear, candid, well-explained and not excessively-detailed disclosures on key judgements and assumptions applied during the assessment will be critical for users, given the current levels of social and economic uncertainty. Disclosures relating to the entity’s access to finance, terms of facilities and any covenants or restrictions will also be important to users.

Financial reporting implications when the entity is a going concern and there is no material uncertainty

If management conclude that the entity is a going concern, the financial statements should be prepared on a going concern basis. If, in reaching this conclusion, management had to apply significant judgement, then this judgement should be disclosed.

In light of the pandemic, it may also be helpful to users to disclose briefly how management determined that there are no material uncertainties in relation to going concern, even if significant judgement was not required to reach this conclusion.

Financial reporting implications when there is a material uncertainty about the going concern status of the entity

If management conclude that there are material uncertainties which may cast significant doubt upon the entity’s ability to continue as a going concern, those uncertainties should be disclosed in the financial statements. The financial statements should be prepared on the going concern basis but include these additional disclosures.

Disclosures on material uncertainties should be specific to the entity’s circumstances. Users will want to understand how management reached their conclusion (including the basis of any assumptions used in their assessment) and how the uncertainty would impact the entity’s resources, liquidity and solvency.

Management may also wish to consider whether the uncertainties would be mitigated by delaying completion of the accounts, and perhaps take advantage of filing extensions or changing the reporting date. For example, an entity might apply for a filing extension in order to confirm receipt of anticipated income from a government scheme.

Financial reporting implications when the entity is not a going concern 

If management conclude that the entity is not a going concern, the financial statements should not be prepared a going concern basis. The entity (including small entities) should disclose this fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern.

While it is expected that assets and liabilities will be measured differently, FRS 102 does not specify the basis on which the accounts should be prepared when the accounts are not prepared on the going concern basis.

When a business ceases to be viable, directors should also be aware of their additional responsibilities as directors, for example, in relation to insolvency and wrongful trading.

How this effects LB Group during the accounts production

LB Group’s policy is that a going concern note should be included in all accounts. We therefore need to make sure that we are getting this right and client has considered the above.

Client managers and partners should be discussing going concern with the client as part of the finalisation process. This not only documents that the above has been thought through, but it is also good practice and conversations along this line can open up opportunities for further work, whether that be tax planning on close down of business, action points ahead of a sale or helping clients with funding.