Going Concern Assessment Amidst COVID-19

The financial statements are prepared on the premise that the entity is a going concern and will continue its operations in the foreseeable future. This assumption holds unless there’s significant evidence to the contrary. The COVID-19 pandemic is a major factor impacting this assumption currently. Both the entity’s management and auditors need to prioritize evaluating the impact of COVID-19 on this going concern assumption.

This article critically evaluates the going concern assessment from both management’s and auditor’s perspectives and also highlights disclosure requirements in light of COVID-19.

Going Concern Assessment from Management’s Perspective

An entity’s assessment regarding going concern heavily relies on its nature and circumstances, including the industry it operates in. Key factors to be considered while assessing going concern include:

Evaluating the impact of COVID-19 on operations and projected cash flow.
Regulatory measures evaluation:
- Effectiveness of measures taken by governments where the entity operates.
- Changes in the entity’s access to capital due to regulatory actions.
- Capability to meet regulatory ratios and prepare timely financial statements as part of annual compliance.
Operating environment evaluation:
- Restructuring requirements like store closures or workforce reductions to generate adequate cash flows.
- Impact on pricing and volume stability influencing revenue.
- Revenue and cash flow loss due to rebates, allowances, and refunds.
- Foreign exchange fluctuations impacting financials.
- Customers sourcing from alternatives during COVID-19 that may not return.
- Operating capability during COVID-19 restrictions and business suitability post-pandemic.
- Increased operating and supply costs due to restrictions during and after COVID-19.
- Raw-material pricing fluctuations due to supply limitations and its effect on projected gross margin levels.
- Costs associated with temporarily suspending operations.
Liquidity measures evaluation (operational and funding):
- Risks related to receivables and trade financing products.
- COVID-19’s impact on refinancing risk and contingent liabilities.

The management should update their going concern assumption regularly during the COVID-19 pandemic taking into consideration industry-specific factors, government support, customer business continuity, funding availability, and any regulatory restrictions or relaxations.

Information sources to assess the going concern assumption include industry reports, third-party studies, data from the World Health Organization (WHO), and governmental advisories on the economic impact of COVID-19.

Impact on Auditor’s Responsibility and Auditor’s Report

During the COVID-19 outbreak, events and conditions that can cast doubt on an entity’s going concern ability have significantly increased, necessitating additional audit procedures to evaluate management’s assessments.

Evaluating management’s future action plans and their feasibility related to going concern.
Considering effects of known or expected events extending beyond the reporting period.
Discussing management strategies about asset liquidation, expenditure deferral, borrowing, debt restructuring, or ownership equity adjustments.

Auditors must reflect the impact of the COVID-19 outbreak on the going concern assumption in their reports as follows:

Situation	Auditor’s Action
Financial statements prepared using going concern basis when inappropriate.	The auditor expresses an adverse opinion.
Using going concern basis appropriately, with disclosed material uncertainty.	The auditor gives an unmodified opinion and includes a section on “Material Uncertainty Related to Going Concern”.
Using going concern basis with undisclosed material uncertainty.	The auditor may give a qualified or adverse opinion.

Disclosure Requirements from COVID-19 Perspective

Disclosure requirements will differ based on individual entity circumstances. However, the following disclosures should be considered due to COVID-19:

Significant doubt about the entity’s going concern ability despite concluding no material uncertainty exists.
The entity’s capability to continue subject to material uncertainty, if such exists.
Any change in financial risks like liquidity, credit, or price risks due to COVID-19.
Additional disclosures might be essential if COVID-19 impacts cash flow or cash access.

Businesses must also consider the legal structure adaptation, such as the potential conversion from One Person Company to a Private Limited Company, to enhance resilience amidst the pandemic.

Furthermore, document requirements can be checked to ensure compliance with potential restructuring or registration processes required during such uncertain times by accessing relevant documentation guidance. It's also critical to review the cost implications linked to compliance and registration pricing during the pandemic.

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Frequently Asked Questions

Common questions about Going Concern Assessment.

The going concern assumption is the underlying principle that an entity will continue its operations for the foreseeable future. It is important because financial statements are prepared based on this assumption. If the entity is not considered a going concern, the financial statements would need to be prepared on a different basis, potentially reflecting liquidation values.

COVID-19 has created significant uncertainty and disruptions that can affect an entity's ability to continue as a going concern. Factors like impact on operations, cash flows, access to capital, regulatory changes, and changes in the operating environment due to COVID-19 need to be carefully evaluated by management and auditors when assessing the going concern assumption.

Management should evaluate the impact of COVID-19 on the entity's operations and forecasted cash flows, assess the effect of regulatory measures and changes in the operating environment, evaluate liquidity and funding measures, and consider the entity's ability to restructure its business or operations as needed.

Auditors should perform additional procedures to evaluate management's assessment of the going concern assumption, including evaluating the feasibility of management's plans, considering the consequences of events after the reporting period, and discussing management's plans for actions such as liquidating assets, reducing expenditures, or restructuring debt.

The auditor may need to express an adverse opinion if the going concern basis is inappropriate, include a separate section on material uncertainty related to going concern if there is adequate disclosure, or issue a qualified or adverse opinion if there is material uncertainty that is not adequately disclosed.

Entities should disclose any significant doubt about their ability to continue as a going concern, even if no material uncertainty exists. If there is material uncertainty, this should be disclosed. Changes in financial risks like liquidity risk, credit risk, or currency risk due to COVID-19 should also be disclosed, along with any impacts on cash flows or ability to access cash.

The going concern assessment should be regularly updated during COVID-19, as the situation is rapidly evolving. The frequency of updates may depend on factors like the industry the entity operates in, government support, customer ability to pay, availability of funding sources, and regulatory changes.

Sources of information that can be used include industry or analyst reports, third-party studies, data from the World Health Organization or local institutions on the COVID-19 outbreak, and data from governmental sources regarding the severity and duration of the economic downturn and potential government actions.

The disclosure requirement may differ based on the specific facts and circumstances of each entity. However, entities should disclose any material uncertainties related to going concern, changes in financial risks, and impacts on cash flows or ability to access cash due to COVID-19.

If the auditor determines that management's plans for addressing going concern issues are inadequate, the auditor may need to express a qualified or adverse opinion in the auditor's report, depending on the adequacy of disclosures related to the material uncertainty.