Question

Question 2

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.

Answer 1

Advise to Airlines company: In view of the lockdowns deployed by various countries, the airlines is completely at standstill as of now & again the same is a very capital intensive business, since majority of the airlines are taken on a lease or loan or financed via debt. The financing of the airlines needs to be checked and see if the finance costs and other running costs are eating into the capital of the company to such an extent that it will impact the continuing operations.Going concern means whether the company is in a position to run its operations or will be running its operations after one year from the statement date and there should be some material indication existing which suggests that the company will not continue its operations - like huge financial and operational losses eating into capital, huge lender dues which are outstanding for a long terms, multiple high value ligitations where company is expecting a defeat, loss of substantial market, government regulation w.r.t. operation etc. As to in case of airlines each of these needs to be looked into by an auditor in details and comment on the going concern assumption for the airlines. Here the growing finance costs, outstanding dues and the lenders approach to airlies would be a key factor, which needs to be analysed by the management.

Advise to pharmaceutical industry: The Covid situation has had limited impact on the pharmaceutical industry as the demand for medicinal supplies has not reduced if not increased. The sales trend for its key products and the costs needs to be analysed, as well as the receivables and payables health. The governments policy regading production, sale, manufacturing or export of certain medicines might have an impact as well - these need to be analysed if it is going to have a material impact, which will jeopardise the going concern principle for the pharmaceutical company. Moreover if the pharmaceutical company was sourcing its key raw materials from a particular country then it can even have a widespread impact, for which the location of vendors, vendor health and government policy w.r.t. import of certain medicines or from a certain country needs to be analysed.