Based on my highly incomplete review of the 118 comment letters received in response to the IASB’s recent agenda consultation, going concern is likely to emerge as one of the highest priority projects.
I wouldn’t have seen that coming, but there you go. Here’s how the Canadian Securities Administrators summarized the issue:
- When preparing financial statements, management must assess an entity’s ability to continue as a going concern. We have observed inconsistencies in how the term “ability to continue as a going concern” is interpreted and applied by management, resulting in inconsistencies in the disclosures that are made when a material uncertainty exists and in some cases, lack of understanding by the users of the financial statements of this matter.
- In addition, we see very few instances of disclosures of significant judgements made by management (paragraph 122 of IAS 1 Presentation of Financial Statements (IAS 1)) in going concern situations where there are mitigating factors which led to management’s conclusion that there was no material uncertainty relating to going concern. Although we acknowledge the useful literature published by IFRIC and IFRS Foundation on the topic of going concern, we strongly believe such literature, particularly relating to these “close-calls”, should be within the body of an IFRS Standard, such as IAS 11 . This would facilitate consistent understanding and enforcement.
- We also note that the auditor’s requirements for “close call” going concern situations in ISA 570 Going Concern (ISA 570) do not adequately align with the accounting and disclosure requirements in IFRS . In February 2021, the CAC commented on the IAASB Discussion Paper on Fraud and Going Concern in an Audit of Financial Statements. In our comments we recommended that any changes to the auditing standards should be considered together with the accounting and disclosure requirements in IFRS.
- As a next step, we think that the IASB should work collaboratively with the IAASB and revise the main body of IAS 1 to explicitly address disclosures for material uncertainties relating to going concern, including the requirement to disclose ‘close call’ significant judgements.
The New Zealand External Reporting Board made much the same points, and threw in some more things to consider:
- the lack of a definition and limited guidance on the meaning of “material uncertainty”;
- the limited guidance on how the going concern assessment should be conducted by management and the extent of analysis required about future operations; and
- whether a mandatory disclosure be introduced, regardless of the entity’s going concern position, explaining the basis for applying the going concern assumption for the preparation of the financial statements.
Deloitte likewise advocates for a clearer overall framework for approaching the issue, and adds that this framework should:
- (expand) the time period of management’s assessment to cover twelve months from the date of approval of the financial statements;
- (specify) that developments after the reporting date but before the financial statements are approved should, as necessary, be factored into the assessment of going concern even if they are not themselves adjusting events under the general requirements of IAS 10, Events After the Reporting Period.
Not everyone shares these concerns, EY ranks the issue as low priority, stating “we do not think that the IASB should add a medium or large project to its agenda on this topic,” while agreeing some clean-up is required. Several other commentators note that such a project should be susceptible to being completed relatively efficiently – KMPG calls it a “quick fix.” Of course, the IASB isn’t generally renowned for moving that way, except in true crisis situations. However, in his inaugural speech, new Chair Andreas Barckow did observe “we have seen many examples of excellent research and outreach by national standard-setters that could, when the scope is clear and the project is well managed, help us to abridge the early stage in a project without cutting corners.” So maybe that’s a glimmer of possibility?
For me there’s something a bit overly technical about some of these submissions, which Eumedion partly gets at in its comment letter:
- The reality is that very few listed entities that fail, are liquidated. In most cases a company is reorganized or parts of its operations are sold while still in going concern. Liquidation accounting is not helpful for investors in assessing the value of a company that is being reorganized, neither for investors in a reporting entity that is in the process of divesting its operations. Therefore, we are not in favour of lowering the thresholds for applying liquidation accounting. That said, improved disclosures about the going concern assumption, its ability to refinance debt over the next 12 months would be more helpful for investors.
That is, the focus shouldn’t be so heavily on the somewhat technical construct of “going concern,” whereby the nature of the warning provided to readers differs radically depending whether the assessment falls on one side of the line versus another, but rather simply on ensuring the maximum clarity of disclosures about risk and liquidity and so forth, whatever the magnitude of the immediate threat. But it may just be the kind of finicky project that standard-setters just can’t resist. Quick fix or not…
The opinions expressed are solely those of the author