Question

Question 1
IAS 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.
Material uncertainties, for example, the coronavirus effects that cast significant doubt on the company’s 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.
Total marks: 20marks

Answer 1

Effects of Covid on Airline Company

I am pleased to provide the report on assessment of IAS 1 Presentation of Financial Statements on the Company due to COVID 19 and the probable impact on the company and the ability to continue as a going concern.

The disclosure requirements of IAS 1 requires the company to disclose all material events in the immediately succeeding 12 months and also if any material event has taken place after the date of balance sheet till the date of signing of the balance sheet.

Considering COVID 19 has begun from end of Dec 2019 and had started to peak during 2020, it is certain that the impact on the financial statements will be material. Many of the countries have imposed lockdown wherein the people are not allowed to move out of their homes for a prolonged period of time. Most of the countries have also imposed travel ban and the airlines are grounded without any operations. This has impacted the airline industry very severely as they have to manage their fixed costs which are considerably very high and at the same time there is no revenue generation at all.

So the basis of ascertaining the going concern basis for the airline company would be whether they have sufficient cash balance to pay off their liabilities over the next 3 months and if they cant and also if they feel that even after resumption of flight operations, they will not be able to pay their liabilities, then they cannot furnish the financial statements on a going concern basis.

Effects of Covid on Pharmaceutical Company

I am pleased to provide the report on assessment of IAS 1 Presentation of Financial Statements on the Company due to COVID 19 and the probable impact on the company and the ability to continue as a going concern.

The disclosure requirements of IAS 1 requires the company to disclose all material events in the immediately succeeding 12 months and also if any material event has taken place after the date of balance sheet till the date of signing of the balance sheet.

It can be said that COVID 19 has a positive impact on the pharmaceutical companies, considering if the company is able to find the vaccination, then it will have a material impact on the financial statements of the company. Further although most of the countries have imposed lockdown, all the countries have allowed supply of essential services and medicines has been defined as essential services. In this context, it can be safely assumed that the regular operations of the company is not severely impacted, however the company will have to assess the impact of COVID on its sales and determine that is has sufficient cash flows to manage the operations of the company. The company can disclose this finding in the financial statements and categorically mention that there is no threat to the going concern basis of the company.