Until now (i.e. 2020, the year COVID-19 changed our lives and created our ‘new normal’), determining whether your business was a ‘going concern’ and whether it was appropriate to prepare the financial statements on the going concern basis, was pretty straightforward. It has not traditionally been something directors or accountants have really had to think too deeply about.

However, now we are in a situation where a significant number of entities have been impacted by the economic downturn arising from COVID-19. As such, the going concern consideration and corresponding financial statement disclosures should be an area of focus for us all.

The NZ Accounting Standards Board has recently issued amendments (FRS 44 amendments for For-Profit entities) and (PBE IPSAS 1 amendments for Public Benefit Entities) to make it clearer what is required to be disclosed in relation to going concern. The existing standards already require disclosure of significant judgements and estimates however more specific requirements were needed to encourage those preparing financial statements to let readers know more about what was considered in determining whether the entity was, in their view, able to continue for another 12 months.

The intention of the changes was to provide readers with more relevant and transparent information about situations where an entity’s ability to continue to operate is uncertain or where significant judgement is applied. Given the uncertainty surrounding us at the moment this information can be quite useful.

The amendments take effect for periods ending on or after 30 September 2020 (i.e. now).

• Think about whether your entity will be able to continue to operate for the next 12 months this should be based on both the ability and the intention to continue
• Management and the directors/trustees should be the ones making this determination (not the accountant or auditor)
• A great deal of judgement is involved in making this call, particularly in estimating future cashflows and revenue and building these into your budgets these judgements should be disclosed in your financial report
• The level of uncertainty (crystal ball gazing) is significant and you’ll need to make some assumptions
• The assumptions made in determining whether your entity is able to continue to operate should be disclosed to the readers of the financial statements (generally under the significant estimates and judgements or going concern section)
• Disclosures should be relevant to your business and its industry. Both the XRB and FMA have publicly encouraged entities to think about the usefulness of disclosures; advising readers of the date Covid-19 was declared a pandemic by the World Health Organisation for example is not considered to provide useful information to those reading your financial statements. Readers are interested in knowing how Covid-19 has impacted, and is expected to impact, your business, and what steps management is taking to mitigate any downside impact.
• Auditors will use these disclosures and assumptions as the basis for deciding whether they agree that your entity will be able to continue, and whether additional disclosure is required to be made in the financial statements or audit report, or potentially (if the auditors do not agree with management’s judgement and/or the disclosures are not adequate) modifying the audit report.

If you find yourself grappling with an entity that may, or may not, be able to survive the economic impact of COVID-19 and you would like a fresh set of eyes to review what is currently being disclosed please get in touch with your Baker Tilly Staples Rodway adviser. 

This article is written by Nicola Hankinson, our National Technical Manager. Nicola is a passionate Chartered Accountant and enjoys helping clients to prepare financial reports that meet requirements, but also help them to articulate their ‘performance story’ and describe how their business has been creating value in the short, medium and long-term.