Question

1

AS 1 Presentation of Financial Statements requires management to assess a company’s ability to continue as a going concern. The going concern assessment needs to be performed up to the date on which the financial statements are issued. The assessment relates to at least the first twelve months after the Statement of Financial Position date, or after the date the financial statements will be signed, but the timeframe might need to be extended.

ability to operate under the going concern basis need to be disclosed in the financial statements. It is highly likely that many companies large and small, and particularly in certain sectors, will have issues relating to the coronavirus that need to be considered by management. There will be a wide range of factors to take into account in going concern judgments and financial projections including travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of suppliers and customers and their effect on expected profitability and other key financial performance ratios including information that shows whether there will be sufficient liquidity to continue to meet obligations when they are due.

You have been hired to advise management of two companies: one is an airline company and the other is in the pharmaceutical industry on how management should assess the existing and anticipated effects of COVID-19 on each of the company’s activities and the appropriateness of the use of the going concern basis

Answer 1

The iCOVID-19 ipandemic icrisis iand iits ieconomic ieffects imean ithat iinvestors iand iother istakeholders ineed ihigh-quality ifinancial iinformation imore ithan iever.

To ithis iend, iaccountancy ifirms, iregulators, iIFAC imember iorganizations iand iothers ihave iquickly imade iavailable iadvice iand iguidance ion ithe iaccounting iand ifinancial ireporting irequirements ithat iwill ineed ito ibe iconsidered iin iaddressing ithe ifinancial ieffects iof iCOVID-19 iwhen ipreparing ifinancial istatements. iMany iof ithese iresources iare iconveniently iavailable ithrough iIFAC’s iCOVID-19 iresource icenter.

There iwill ibe iissues ito iconsider ifor ithis iyear’s ireporting ias iwell ias iin ifuture iyears. iSome icompanies imay ifirst ireport ifinancial ieffects iin iinterim ifinancial istatements i(in iaccordance iwith iIAS i34 i– iInterim iFinancial iReporting), iwhich iwill ilikely iinvolve ithe igreater iuse iof iaccounting iestimates. iHowever, iinformation imust ibe ireliable iand iall imaterial ifinancial iinformation irelevant ito ian iunderstanding iof ithe ifinancial iposition ior iperformance iof ithe icompany ishould ibe iappropriately idisclosed.

There imay ialso ibe idifferences iin iapproach idepending ion iwhether ifinancial istatements iare iprepared iusing iIFRS ior inational iGAAP.

i i i i i i i i i i i i i i i i i i i i i i i iIAS i10 iEvents iafter ithe iReporting iPeriod icontains irequirements ifor iwhen iadjusting ievents i(those ithat iprovide ievidence iof iconditions ithat iexisted iat ithe iend iof ithe ireporting iperiod) iand inon-adjusting ievents i(those ithat iare iindicative iof iconditions ithat iarose iafter ithe ireporting iperiod) ineed ito ibe ireflected iin ithe ifinancial istatements. iAmounts irecognized iin ithe ifinancial istatements iare iadjusted ito ireflect iadjusting ievents, ibut ionly idisclosures iare irequired ifor imaterial inon-adjusting ievents.

i i i i i i i i i i i i i i i i i i i i iIAS i1 iPresentation iof iFinancial iStatements irequires imanagement ito iassess ia icompany’s iability ito icontinue ias ia igoing iconcern. iThe igoing iconcern iassessment ineeds ito ibe iperformed iup ito ithe idate ion iwhich ithe ifinancial istatements iare iissued. iThe iassessment irelates ito iat ileast ithe ifirst itwelve imonths iafter ithe ibalance isheet idate, ior iafter ithe idate ithe ifinancial istatements iwill ibe isigned, ibut ithe itimeframe imight ineed ito ibe iextended.

Material iuncertainties ithat icast isignificant idoubt ion ithe icompany’s iability ito ioperate iunder ithe igoing iconcern ibasis ineed ito ibe idisclosed iin ithe ifinancial istatements. iIt iis ihighly ilikely ithat imany icompanies ilarge iand ismall, iand iparticularly iin icertain isectors, iwill ihave iissues irelating ito ithe icurrent isituation ithat ineed ito ibe iconsidered iby imanagement. iThere iwill ibe ia iwide irange iof ifactors ito itake iinto iaccount iin igoing iconcern ijudgments iand ifinancial iprojections iincluding itravel ibans, irestrictions, igovernment iassistance iand ipotential isources iof ireplacement ifinancing, ifinancial ihealth iof isuppliers iand icustomers iand itheir ieffect ion iexpected iprofitability iand iother ikey ifinancial iperformance iratios iincluding iinformation ithat ishows iwhether ithere iwill ibe isufficient iliquidity ito icontinue ito imeet i iobligations iwhen ithey iare idue.

Given ithe isignificant iuncertainty, idisclosure ishould iinclude ithose isignificant iassumptions iand ijudgments iapplied iin imaking igoing iconcern iassessments. iAssessments iwill ilikely ineed ito iinclude idifferent iscenarios iwith ivarying iassumptions iwhich ican ibe iupdated ito itake iinto iaccount ithe ievolving inature iof iuncertainties.

Management ishould iassess ithe iexisting iand ianticipated ieffects iof iCOVID-19 ion ithe icompany’s iactivities iand ithe iappropriateness iof ithe iuse iof ithe igoing iconcern ibasis. iIf iit iis idecided ito ieither iliquidate ior ito icease itrading ior ithe icompany ihas ino irealistic ialternative ibut ito ido iso iit iis ino ilonger ia igoing iconcern iand ithe ifinancial istatements imay ihave ito ibe iprepared ion ianother ibasis, isuch ias ia iliquidation ibasis.

Throughout i2020, icompanies iwill ineed ito ireview iall iareas iof ithe iaccounts ithat iare isubject ito ijudgment iand iestimation iuncertainty. iThe iuse iof iforecast iinformation iis ipervasive iin iassessing ia irange iof ieffects iin iaddition ito igoing iconcern iincluding ithe iimpairment iof ifinancial iand inon‑financial iassets, iexpected icredit ilosses, iand ithe irecoverability iof ideferred itax iassets.