From next year businesses will need to improve their assessment of the going concern basis for financial statement preparation. This follows publication of the FRC’s revised standard in response to recent well-publicised corporate failures (Carillion and Thomas Cook etc) where the auditor’s report failed to highlight concerns about the prospects of entities which collapsed shortly after.
What is going concern? A company prepares financial statements on a going concern basis under the assumption that they can continue operations for at least the following 12 months. It is assumed that the company does not have the intention, or need, to liquidate its assets, and the financial statements are prepared accordingly.
What does this mean for directors? It is the responsibility of the company directors to provide an assessment as to whether the going concern assumption is appropriate. For small companies this could include preparation of budgets, sales forecasts and a review of borrowing arrangements to ensure the entity can meet its obligations in the future. For medium and large companies, the work would extend beyond that of small companies to include areas such as market/product/contractual risks and the timing of cashflows before they can conclude on the entity’s ability to continue as a going concern.
What do the changes mean? The revised standard means UK auditors will follow significantly stronger requirements than those currently required. This will involve work by the auditor to: • more robustly challenge the director’s assessment of going concern and thoroughly test the adequacy of the supporting evidence. • provide transparent reporting for large organisations on whether management’s assessment is appropriate, and to set out the work they have done in this respect. • stand back and consider all of the evidence obtained, whether corroborative or contradictory, before drawing conclusions on going concern.
These changes are due to come into force from 15 December 2019 and going forward businesses will need to make sure they have a solid case for going concern.
If your business needs help preparing forward projections or pulling a case together for going concern, then please get in touch.