Determining whether your business is a “going concern” – and whether it is appropriate to prepare the financial statements on the going concern basis, is pretty straightforward. It hasn’t traditionally been something directors or accountants have really had to think too deeply about.

However, we are in a situation where a significant number of entities are being impacted by an economic downturn and global political and economic uncertainty. As such, the going concern consideration and corresponding financial statement disclosures should be an area of focus for all of us.

The New Zealand Accounting Standards Board has issued amendments to the applicable standards (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 intention is to provide readers with relevant and transparent information about situations where an entity’s ability to continue to operate is uncertain or where significant judgement is applied. Given uncertainty surrounding us this information can be useful.

In summary:

• 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 cash flows 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 can 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 a crisis starts may not be useful information to those reading your financial statements. However, readers would be interested in knowing how the crisis has impacted/is expected to impact, your business, and what steps management is taking to mitigate any 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 economic downturn and you would like a fresh set of eyes to review what is being disclosed, please get in touch with your Baker Tilly Staples Rodway adviser.