Going Concern Considerations2 July, 2020
Presumption of carrying on business as a Going Concern
Paragraph 11 of Schedule 3 of the Companies Act 2014 (the “Act”) provides that the amounts to be included in the financial statements of a company are to be determined in accordance with accounting principles set out in Paragraphs 12 to 17 of Schedule 3 of the Act.
Paragraph 12 of Schedule 3 of the Act provides that the company shall be presumed to be carrying on business as a going concern.
Departure from the Going Concern Presumption
Paragraph 18 of Schedule 3 of the Act provides that if it appears to the directors of the company that there are special reasons for departing from any of the principles in preparing the company’s financial statements in any particular year, the directors may so depart, but the particulars of the departure, the reasons for it and its effect on the balance sheet and profit and loss account of the company shall be stated in a note to the financial statements. As the presumption that the business of company is carried on a business concern is one of the principles in preparing the company’s financial statements, if the directors are to depart from it, they must state the particulars of this, the reasons for it and its effect on the balance sheet and profit and loss account of the company in a note to the financial statements of the company.
Furthermore, ISA (Ireland) 570 requires the auditor of the company to obtain sufficient appropriate audit evidence regarding, and to conclude on, the appropriateness of the directors’ use of the going concern basis of accounting in the preparation of the financial statements of the company, and to conclude, based on the audit evidence obtained, whether a material uncertainty exists about the company’s ability to continue as a going concern. The auditor cannot form this conclusion until the directors have made their own assessment and conclusion on this matter. Therefore, the auditor needs to ask the directors of the company for this assessment and then challenge its appropriateness in the current situation.
Furthermore, section 291(5) of the Act provides that departure from the accounting principles is required in the case where preparation in accordance with the accounting principles would not give a true and real view.
Other than the notification requirements by both the directors and auditors of the company, there are no further steps or consequences that need to be carried out and there is no requirement that the company be wound up.
What must the directors of the company do in order to assess whether the company is carrying on business as a going concern?
Paragraph 18 means that the directors of the company must assess the company’s ability to continue as a going concern and in particular now, will need to consider the current economic uncertainty and market volatility caused by the COVID-19 pandemic. The extent to which the COVID-19 pandemic will impact on the directors’ going concern assessment of the company will depend on the company’s specific circumstances, including its existing financial health and the degree to which the company’s business is exposed to operational and financial risks associated with the COVID-19 pandemic containment efforts.
It will be important for the directors of the company to assess what impacts the current events and conditions have on the company’s operations and forecast cash flows, with a key issue being whether the company will have sufficient liquidity to continue to meet its obligations as they fall due. Budgets and forecasts for 2020 prepared in 2019 may now be of limited relevance given the rapidly changing economic and business circumstances and may require significant revision to be able the support the directors’ assessment in the current environment.
The Financial Reporting Council, as accounting standard setter for Ireland and the United Kingdom, has stated in its guidance to companies that if a material uncertainty does exist, the company should disclose it in terms that are as specific to the company as possible, as third parties will wish to know how and when the uncertainty might crystallise and its impact on the resources, operational capacity, liquidity and solvency of the company.
What must the auditors of the company do in order to assess whether the directors’ assessment as to going concern is correct?
• Inquire of the directors of the company as to what assessment they have made of the company’s ability to continue as a going concern, in light of the current circumstances with COVID-19;
• Evaluate the directors’ assessment and assess that the assumptions underlying it are reasonable;
• Consider the adequacy of disclosures that the directors of the company plan to make to the financial statements of the company; and
• Form a conclusion and determine the impact on audit reporting.
What amendment might the auditors of the company make to their report following their assessment?
• An unmodified (clean) report;
• An emphasis of matter paragraph to highlight a significant uncertainty arising from COVID-19;
• A material uncertainty in relation to the going concern paragraph:
• A qualification or adverse opinion in respect of inadequate disclosures in the financial statements by the directors of the company; or
• A qualified opinion or a disclaimer of opinion as a result of a scope limitation in the event of an inability to obtain sufficient appropriate audit evidence.