IFRS Foundation publishes educational material on going concern Companies preparing financial statements using IFRS Standards are required to assess their ability to continue as a going concern. Entities will therefore need to develop an appropriate basis of preparation. The problem is that IAS 1 does not tell us how to prepare the financial statements when going concern does not apply. ICAEW.com works better with JavaScript enabled. In November a review of completed audits by the Financial Reporting Council (FRC) found that audit firms have implemented additional measures to enhance their evaluation of companies’ going concern assessments since the start of the Covid-19 pandemic. 4 February 2021: The IFRS Foundation has published a document designed to help preparers of IFRS accounts through the intricacies of applying going concern requirements, in response to the current volatile economic conditions. An entity shall prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading, or has no realistic alternative but to do so. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. Going concern is one of the fundamental principles of reporting under IFRS (and other major GAAP). An error has occurred, please try again later. The concept of going concern is not just an audit-specific issue and there are a number of key issues accountants and clients need to be aware of around it, writes Steve Collings. IFRS does not provide guidance on the liquidation basis of accounting. Companies preparing financial statements using IFRS Standards are required to assess their ability to continue as a going concern. The term ‘foreseeable future’ is not defined within ISA 570, but IAS 1®, Presentation of Financial Statements deems the foreseeable future to be a period of at least 12 months from the end of … Under GAAP, the standard regarding going concern is defined under AU Section 341. Going concern – the underlying basis of financial statements. an explicit statement that there is a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern, and therefore that it may be unable to realise its assets and discharge its liabilities in the normal course of business. However, in GAAP, going concern period is taken as generally 12 months from the balance sheet date or 12 months from the date the financial statements are released. © IFRS Foundation 2017. Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate … In the current stressed economic environment arising from the covid-19 pandemic, deciding whether the financial statements should be prepared on a going concern … Companies preparing financial statements using IFRS Standards are required to assess their ability to continue as a going concern. In the current stressed economic environment arising from the COVID-19 pandemic, deciding whether the financial statements should be prepared on a going concern … In particular under the provisions of both UK GAAP and IF… Stakeholders are increasingly concerned about the impact of the COVID-19 pandemic on entities’ ability to continue as a going concern given the significant profitability and liquidity. The presumption of going concern for the business implies the basic declaration of intention to keep operating its activities at least for the next year, which is a basic assumption for preparing financial statements that comprehend the conceptual framework of the IFRS. Accounting to IFRS, the going concern is for a period defined as the foreseeable future. The review found that the additional policies and procedures introduced earlier in the year had been substantially applied in practice. In step 2 of the going-concern assessment, an entity must apply the guidance in ASC 205-40-50-6, which requires the entity to “evaluate whether its plans that are intended to mitigate [the conditions and events identified in step 1], when implemented, will alleviate substantial doubt about the entity’s ability to continue as a going concern.” Marianne Mau, Technical Lead in ICAEW’s Financial Reporting Faculty, said: “Going concern is right at the top of the agenda for a lot of preparers of accounts, auditors and users of accounts because of the challenging circumstances in which we find ourselves. When testing going concern, it will be helpful to be aware of time and resource pressures faced by management and the finance team. You can view which cookies are used by viewing the details in our privacy policy. The IFRS Interpretations Committee considered feedback on the comment letters received on its tentative agenda decision regarding disclosures required in relation to material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. Session expired, please refresh your browser. Stakeholders are increasingly concerned about the impact of reduced revenue, profitability and liquidity due to COVID-19 and this has increased the importance of going concern assessments and related disclosures, the document warns. Stay up-to-date with the latest Coronavirus news: Sign up for daily news alerts. In order to assume that the entity has no going concern problem, the … [IAS 1.25] An assessment whether the going concern assumption is justified includes events after the reporting period end. Under GAAP, an entity applies the going concern basis of accounting unless and until its liquidation becomes imminent, at which time the Accessibility   |   Privacy   |   Terms and Conditions   |   Trade mark guidelines   |   All legal information   |   Using our website. Going concern is an accounting term for a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future. a going concern basis is a binary decision, but the circumstances in which entities prepare financial statements on a going concern basis will vary widely. a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern” (IAS 1.25). In the going concern forecast, it must be analyzed whether the circumstances - from today's perspective - make it predominantly likely that the company will be able to continue as a going concern in the next twelve months. However, she warned that the document didn’t necessarily make the application of going concern any easier. 4 February 2021: The IFRS Foundation has published a document designed to help preparers of IFRS accounts through the intricacies of applying going concern requirements, in response to the current volatile economic conditions. The Interpretations Committee received a submission requesting clarification about the disclosures required in relation to material uncertainties related to events or conditions that may cast significant doubt upon the entity’s ability to continue as a going concern. IAS 1 — Disclosure requirements about an assessment of going concern; 15 Jul 2014. Please remove any invalid characters ('', '+', '|'), links or URLs (e.g www.ifrs.org, http://www.ifrs.org) from the 'Your query' field and re-submit. going concern basis of accounting, as their financial statements are presumed, in law, to give a true and fair view if the (minimal) legal disclosure requirements are ... IFRS 7 IAS 1 IAS 37 66P 4.10 to 4.11 Strategic report The strategic report must contain a description of the principal risks and uncertainties facing the company Companies The educational material is published to support consistent application of IFRS Standards and does not change, or add to, existing requirements. IAS 1 states 'When preparing financial statements, management shall make an assessment of an entity’s ability to continue as a going concern. The first question people will ask is ‘will this business still be around in 12 months’ time?’”. The going concern concept of accounting is of great importance for accountants because if a company is a going concern, it must prepare its financial statements in accordance with applicable financial reporting framework such as generally accepted accounting principals applicable in United States of America (US-GAAP) and international financial reporting standards (IFRS). Going concern is a fundamental assumption that generally underlies the preparation of the financial statements of all companies. An entity prepares financial statements on a going concern basis when, under the going concern assumption, the entity is viewed as continuing in business for the foreseeable future. ... Steve is an Editorial Board member for Wiley Insight IFRS and sits on the AAT's Financial Reporting Technical Panel. IFRS requirements for going concern assessments and the disclosure of material uncertainties and significant judgements. The volatility of trading conditions has unsurprisingly ramped up the work involved in going concern assessments, Mau added. Neither Standard however provides any details of an alternative basis of preparation and how it may differ from the going concern basis. Going concern has certainly moved up the ranks in the accounting profession in recent years, particularly in light of some well-publicised corporate collapses. Head office: Columbus Building, 7 Westferry Circus, Canary Wharf, London E14 4HD, UK. The International Financial Reporting Standards Foundation is a not-for-profit corporation incorporated in the State of Delaware, United States of America, with the Delaware Division of Companies (file no: 3353113), and is registered as an overseas company in England and Wales (reg no: FC023235). Definition: Going concern is the concept that the entity’s Financial Statements are prepared based on the assumption that the entity operation is still operating normally in the next foreseeable period. The same definition is used in both UK GAAP and IFRS, as follows: “An entity is a going concern unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so.” Going concern has certainly moved up the ranks in the accounting profession in recent years, particularly in light of some well-publicised corporate collapses. Where there are ‘material … Evidence regarding going concern is often provided in the form of cash flow models and/or budget forecast models, as well as details of future sales pipeline projections. a going concern basis, it shall disclose that fact, together with the basis on which it prepared the financial statements and the reason why the entity is not regarded as a going concern” (IAS 1.25). statements on a going concern basis, IFRS requires that the entity disclose the basis of preparation used. The going concern principle is the assumption that an entity will remain in business for the foreseeable future. The circumstances could range from when an entity is profitable and has no liquidity concerns to when it is a ‘close call’ to prepare the financial statements 2020/21 Reporting Season: IFRS Foundation releases going concern guidance, https://www.icaew.com/insights/covid-19-global-recovery/covid-19-going-concern, Core Accounting and Tax Service (Bloomsbury), Read the IFRS Foundation’s education document in full at. IAS 1 appears then to suggest that a departure from the going concern basis is required when the specified circumstances exist. As already mentioned, under such assumption an entity is viewed as continuing in business for the foreseeable future and therefore it accounts for its assets and liabilities on the basis that it will be able to realise and discharge them in the normal course of business rather than in a winding up. This foreseeable period normally has twelve months from the ending period of Financial Statements.. Going concern The Conceptual Framework notes that financial state­ments are normally prepared assuming the entity is a going concern and will continue in operation for the fore­see­able future. Invalid characters in 'Your Query' field. The above article is part of a series looking at the challenges of the corporate reporting season in 2020/21. This website uses cookies. The requirements in IAS 1 can be depicted as set out in the diagram on page 2 of this education document labelled ‘Applying the requirements in IAS 1’. “Everything will require more evidence, more thought-processes and more work.” The education document serves as a reminder as to what is expected of accounts preparers and reinforces some key messages about timescales, the work involved and how important the disclosure is, Mau added. It means that the financial statements are prepared under the assumption that the entity will continue its operations in the foreseeable future (at least 12 months). Under IFRS Standards, financial statements are prepared on a going concern basis, unless management intends or has no realistic alternative other than to liquidate the company or stop trading. IAS 1 requires the management to assess whether an entity is a going concern, that is: whether the management does not intend to liquidate the entity or to cease trading, or have any realistic alternative but to … Going concern considerations, including financing challenges Management is required to assess a company’s ability to continue as a going concern. Under current UK GAAP (FRS 18 Accounting Policies and the FRSSE (effective April 2008 and January 2015) and EU-adopted IFRS), it is the responsibility of the directors of companies to satisfy themselves that the use of the going concern basis of accounting is reasonable so as to conclude that the financial statements give a true and fair view. Access the Going concern—a focus on disclosure educational material. In the current stressed economic environment arising from the covid-19 pandemic, deciding whether the financial statements should be prepared on a going concern basis may involve a greater degree of judgement than usual. [Conceptual Framework, paragraph 4.1] IAS 1 requires man­age­ment to make an as­sess­ment of an entity's ability to continue as a going concern. It says that all entities have to prepare financial statements on a going concern basis unless management either intends to liquidate the entity or to cease trading or has no realistic alternative but to do so. The management of entities materially affected by COVID-19 will have to consider the reasonableness of adopting the going concern assumption when preparing financial statements, even if the material effect on their business has occurred after the reporting period … There is no description of what you should do, … The educational material is published to support consistent application of IFRS Standards and does not change, or add to, existing requirements. “You still have to make all those judgements and craft the disclosure, and that’s likely to be challenging for many.”. Please complete the CAPTCHA field to verify you are human. A company is no longer a going concern if management either intends to liquidate the company or cease trading, or has no realistic alternative but to do so. This IFRS Viewpoint addresses some of … The Foundation has committed to supporting stakeholders during the pandemic; further educational materials published by the IFRS Foundation in relation to the covid-19 pandemic can also be accessed under the ‘Supporting application’ section of this page. “People are feeling really challenged and there is so much focus on going concern, so some handholding is useful,” Mau said. Publication: Use of IFRS Standards around the world [PDF], How the IFRS Interpretations Committee helps support consistent application, Supporting materials for the IFRS for SMEs Standard, IFRS Foundation publishes educational material, supporting stakeholders during the pandemic, IAS 1 Presentation of Financial Statements. Both IAS 1 and IAS 10 suggest that a departure from the going concern basis is required when specified circumstances exist. The Institute of Chartered Accountants in England and Wales, incorporated by Royal Charter RC000246 with registered office at Chartered Accountants’ Hall, Moorgate Place, London EC2R 6EA. To support companies, the educational material brings together the requirements in IFRS Standards relevant for going concern assessments. The IFRS Foundation's logo and the IFRS for SMEs® logo, the IASB® logo, the ‘Hexagon Device’, eIFRS®, IAS®, IASB®, IFRIC®, IFRS®, IFRS for SMEs®, IFRS Foundation®, International Accounting Standards®, International Financial Reporting Standards®, NIIF® and SIC® are registered trade marks of the IFRS Foundation, further details of which are available from the IFRS Foundation on request. 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