21 Apr 2021

Going concern – a hot topic in financial reporting

What is going concern and why is it important?

Going concern is the reporting concept that a business will continue to operate into the foreseeable future – which in the UK is a minimum of 12 months from the date that accounts are approved. Given the ever-increasing number of high-profile corporate failures, coupled with the uncertainty of a global pandemic, it shouldn’t come as a surprise that users of accounts and regulators are demanding better reporting in this area.

The contents of the revised ISA 570 Going Concern have been with us since late 2019, but the December 2020 year-end reporting season brought a renewed focus, along with beefed up audit reporting required under the revised ISA 700.

What has changed?

Even for a business trading profitably, with a solid balance sheet, cash reserves and low net debt – there will very likely be more work required by management and auditors, in order to comply with the revised standards.

Directors will be expected to forecast for at least a rolling 12-month future period and these forecasts will be scrutinised more heavily by auditors. No longer will going concern be a light touch exercise, at the end of a reporting assignment.

Management should note thought processes and underlying assumptions used in their assessment of going concern and expect more robust challenges from auditors, who are also now required to stand back form the process, form their own opinion and compare it to management’s assessment.

Questions that must be considered carefully and documented will include:

  • How has the business been impacted to date by Covid-19?
  • Is cash generation holding up in the business – and will customers still be able to pay?
  • Will the entity be able to meet all current liabilities? If not, can credit terms be extended?
  • Is there headroom in current funding facilities? Are covenants being met and for how long?
  • What other funding options are available? Plan B, C, D etc
  • Does the business rely on group funding – will that support continue?

Forecasting has always been an art form, but during a pandemic, sensitivity/what if analysis has been more important than ever, particularly in the food, drink and hospitality industry hit by closures, changing VAT rates and industry specific support measures such as Eat Out to Help Out.

Audit must now make a more definitive statement around the appropriateness of management’s use of the going concern basis and whether audit evidence suggests any material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If there are material uncertainties, directors must continue to explain the uncertainty and how they evaluated it in the notes to the accounts – assuming this is adequate, auditors will continue to draw attention to this in their report and state that a material uncertainty exists.

If you have any questions on how to approach assessing your business as a going concern and/or related narrative reporting, please get in touch.

Other articles you may be interested in: 

How can Key Personal Insurance protect your family and your business?

How the new Restructuring Plan can help food and drink businesses on the road to recovery

Will revised VAT rules on mixed supplies hamper businesses?

Get in touch

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