Presumptionof carrying on business as a Going Concern
Paragraph11 of Schedule 3 of the Companies Act 2014 (the “Act”) provides that theamounts to be included in the financial statements of a company are to bedetermined in accordance with accounting principles set out in Paragraphs 12 to17 of Schedule 3 of the Act.
Paragraph12 of Schedule 3 of the Act provides that the company shall be presumed to becarrying on business as a going concern.
Departurefrom the Going Concern Presumption
Paragraph18 of Schedule 3 of the Act provides that if it appears to the directors of thecompany that there are special reasons for departing from any of the principlesin preparing the company’s financial statements in any particular year, thedirectors may so depart, but the particulars of the departure, the reasons forit and its effect on the balance sheet and profit and loss account of thecompany shall be stated in a note to the financial statements. Asthe presumption that the business of company is carried on a business concernis one of the principles in preparing the company’s financial statements, ifthe 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 lossaccount 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 sufficientappropriate audit evidence regarding, and to conclude on, the appropriatenessof the directors’ use of the going concern basis of accounting in thepreparation of the financial statements of the company, and to conclude, basedon the audit evidence obtained, whether a material uncertainty exists about thecompany’s ability to continue as a going concern. The auditor cannot formthis conclusion until the directors have made their own assessment andconclusion on this matter. Therefore, the auditor needs to ask thedirectors of the company for this assessment and then challenge itsappropriateness in the current situation.
Furthermore,section 291(5) of the Act provides that departure from the accountingprinciples is required in the case where preparation in accordance with theaccounting principles would not give a true and real view.
Otherthan the notification requirements by both the directors and auditors of thecompany, there are no further steps or consequences that need to be carried outand there is no requirement that the company be wound up.
Whatmust the directors of the company do in order to assess whether the company iscarrying on business as a going concern?
Paragraph18 means that the directors of the company must assess the company’s ability tocontinue as a going concern and in particular now, will need to consider thecurrent economic uncertainty and market volatility caused by the COVID-19pandemic. The extent to which the COVID-19 pandemic will impact on thedirectors’ going concern assessment of the company will depend on the company’sspecific circumstances, including its existing financial health and the degreeto which the company’s business is exposed to operational and financial risksassociated with the COVID-19 pandemic containment efforts.
Itwill be important for the directors of the company to assess what impacts thecurrent events and conditions have on the company’s operations and forecast cashflows, with a key issue being whether the company will have sufficientliquidity to continue to meet its obligations as they fall due. Budgetsand forecasts for 2020 prepared in 2019 may now be of limited relevance giventhe rapidly changing economic and business circumstances and may requiresignificant revision to be able the support the directors’ assessment in thecurrent environment.
TheFinancial Reporting Council, as accounting standard setter for Irelandand the United Kingdom, has stated in its guidance to companies that if amaterial uncertainty does exist, the company should disclose it in terms thatare as specific to the company as possible, as third parties will wish to knowhow and when the uncertainty might crystallise and its impact on the resources,operational capacity, liquidity and solvency of the company.
Whatmust 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.
Whatamendment might the auditors of the company make to their report following theirassessment?
• 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.
This note is for general information purposes and does not constitute legal advice. Legal advice must be obtained for all individual circumstances. Each case must be assessed on its own merits
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John Darby
John graduated with an Honours BCL law degree from University College Dublin in 1994 and was admitted as a solicitor in Ireland in 1997. He has also diplomas in European Law from the Universite des Sciences Sociales, Toulouse and the University of Amsterdam....View Profile
