Going Concern - Part 1

During the boom years it was generally assumed that companies would continue trading.  Now, however, things have changed ...

and for many companies there is some doubt as to whether they will viable going forward. These doubts may arise due to trading issues, bank funding difficulties or other issues.  Whether or not a company can be considered as a going concern relates to whether or not a company is expected be in existence in the foreseeable future  .

The purpose of this Bulletin is to remind directors of their responsibilities with regard to going concern.

Directors’ Responsibilities
The decision as to whether or not a company can continue as a going concern is one which is the responsibility of directors, and not the accountant or auditor. Hence directors need to make their own assessment and base it on reasonable conclusions.
Directors are required under accounting standards to:
a) Make an assessment of the company’s ability to continue as a going concern; and
b) To ensure, if there are uncertainties in relation to a company’s ability to continue as a going concern these are adequately disclosed in the financial statements.

Examples of possible events or conditions that may cast doubt on the entity’s ability to continue as a going concern are: your company is in breach of loan covenants so there is a risk facilities may be withdrawn or your customers are taking longer to pay or some of your key suppliers are in difficulty.
A more comprehensive list is available in Appendix 2 of the document “Going Concern Issues During The Current Economic Conditions”2
Going concern basis, what does it mean?
Regardless of whether a company is subject to audit, a company’s financial statements are required to give a “true and fair view” of the financial health of the company. In order to give a true and fair view the financial statements need to be prepared on an appropriate basis. This means an assessment needs to be carried out as to whether or not the company will be around in the foreseeable future. If the decision is that it will not be the accounts should not be prepared on a going concern basis.

When the company is considered to be a going concern the financial statements are prepared on a going concern basis. If the company is not considered a going concern the financial statements are prepared on a break-up basis.

Examples of when financial statements should not be prepared on a going concern basis (but should be prepared on a “Break –up basis” are:

When a company has either the necessity or intention to:
• Enter into a scheme of arrangement with its creditors; or
• Be  placed into administrative receivership or liquidation
Areas for consideration in making an assessment
• Forecasts and budgets
• Borrowing requirements
• Liability management
• Contingent liabilities
• Products and markets
• Financial risk management
• Financial adaptability
• Other factors
The importance of the areas above will vary from company to company when assessing going concern and this is not an exhaustive list.

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