Educational material on going concern and disclosures
On 13 January 2021, the IFRS Foundation issued educational material entitled Going concern – a focus on disclosure (available here) to support entities in the application of IFRS standards (in particular, IAS 1 and IAS 10) when preparing their financial statements on a going concern basis.
Keywords: Mazars, Thailand, IFRS, IAS 1, IAS 10
26 March 2021
In the current environment of crisis, many entities have seen a downturn in their revenue, profitability and hence liquidity which may raise questions to a greater or lesser extent about their ability to continue as a going concern. Deciding whether financial statements should be prepared on a going concern basis may therefore involve a greater degree of judgement than usual.
The IFRS Foundation has therefore set out the disclosures required, highlighting the interactions between the general requirements of IAS 1 to disclose the basis of preparation of the financial statements, and the specific requirements for reporting on a going concern basis.
Three scenarios are presented when an entity ultimately concludes that it should prepare its financial statements on a going concern basis:
Scenario 1: no significant doubts
Where an entity decides that there are no significant doubts as to its capacity to continue as a going concern, no specific disclosures are necessary other than the fact that the entity has prepared its financial statements on a going concern basis. In this scenario, it is unlikely that the entity has made significant judgments in order to reach a decision, and therefore also unlikely that it needs to disclose the judgments underlying its analysis.
Scenario 2: significant doubts about going concern, but no material uncertainties remaining after analysis of mitigating actions
Such a case was the subject of an IFRS IC Agenda Decision in 2014 (available here). The Interpretations Committee decided that significant judgment was required in order to conclude, after an analysis of measures in mitigation, that there was no material uncertainty as to the entity’s ability to continue as a going concern, and that these judgments were therefore subject to the disclosure requirements of IAS 1.122.
Scenario 3: significant doubts about going concern, with material uncertainties remaining after analysis of mitigating actions
In this scenario, an entity is very close to being no longer able to prepare its financial statements on a going concern basis. Therefore, in application of IAS 1.25, the entity must provide disclosures about the events and conditions causing material uncertainties as to its ability to continue as a going concern.
Furthermore, the conclusion to prepare the financial statements on a going concern basis is likely to have involved significant judgement. If this is the case, the entity is also required to apply the disclosure requirements in IAS 1.122. The educational material clarifies that in practice, an entity must provide information on its significant judgments about (a) the events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern and (b) the feasibility and effectiveness of management’s actions or plans in response to those events or conditions.
Finally, the Foundation’s paper observes that under scenario 3 the disclosure requirements relating to sources of estimation uncertainty in IAS 1 paragraphs 125–133 (in particular the assumptions an entity makes about the future) could also be relevant.
In conclusion, the Foundation stresses that going concern is a topical matter that has been recently discussed by accounting standard-setters. The increased salience of this issue means that it may also feature in the list of the topics likely to be included in the IASB’s next work plan (see the consultation expected in March).
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