The IFRS Foundation has issued educational material to support companies in consistent application of going concern requirements under International Financial Reporting Standards (IFRS).
The educational material, Going Concern—A Focus on Disclosure, neither changes nor adds to the existing IFRS requirements. IFRS requires companies preparing financial statements under IFRS 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 basis may involve a greater degree of judgment than usual. To support companies, the educational material brings together the requirements in IFRS relevant for going concern assessments.
Going Concern Disclosure under IFRS
As discussed in the educational material, under International Accounting Standard (IAS) 1, Presentation of Financial Statements, companies must disclose material uncertainties relating to the entity’s ability to continue as a going concern. IAS 1 defines going concern by explaining that financial statements are prepared 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. Factors that management may need to consider when assessing whether the going concern basis of preparation is appropriate are those factors that relate to the entity’s current and expected profitability, the timing of repayment of existing financing facilities, and potential sources of replacement financing.
As IAS 1 requires management to take into account all available information about the future, given the current stressed environment, entities may be affected by a wider range of factors than previously. Thus management needs to consider those additional factors. These include the effects of temporary shut-downs or curtailment of activities, potentially imposed by governments, the availability of government support, and the effects of longer-term structural changes in the market place, including changes in customer behavior.
Using the Education Material
The educational material provides guidance on how to assess the applicable factors for an entity’s particular situation. It includes a flowchart that considers four potential scenarios ranging from an entity with no significant doubts about going concern to an intention to liquidate. The flowchart uses the scenarios to provide guidance on assessing the effect of a deteriorating situation on the entity. The discussion includes how management can do a dynamic assessment of the applicable environment and effect on the entity, focus on disclosures relating to going concern, and evaluate assumptions management uses in reaching conclusions on the entity’s ability to continue as a going concern.
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