Last updated: June 2nd, 2020 3:15 AM

Going concern assessment amidst COVID-19

The financial statements are prepared on the assumption that the entity is a going concern and will continue its operations during the foreseeable future. Notably, an entity is assumed to be a going concern in the absence of any contrary, significant status quo. Various aspects affect an entity’s ability to continue as a going concern and, at present, the impact of COVID-19 is going to be a significant aspect. Both the entity’s management personnel and the auditors need to give high priority to various areas and assess the impact of COVID-19 on going concern assumption. The present article critically evaluates the going concern assessment from management’s perspective as well as the auditor’s perspective. The article also covers the disclosure requirement from the viewpoint of COVID-19.

Going concern assessment from management’s perspective

The entity’s assessment with regard to going concern majorly depends on the nature and circumstances of the entity, which includes the industry in which the entity operates. Some of the depending factors, which need to be kept in mind while assessing the going concern, are highlighted hereunder-

• Evaluating the impact of COVID-19 on the entity’s operations and forecasted cash flow.
• Evaluation of regulatory measures-
  • The effective of the measures taken up by the Governments, where the entity operates.
  • Changes to the entity’s access to capital effected by the measures taken by the regulators.
  • The entity’s capability to meet regulatory ratios.
  • The entity’s capability to prepare timely financial statements or other required filings.
• Evaluation of operating environment measures-
  • Restructuring entity and its business (like store closure, workforce reduction) may be needed to generate adequate cash flows.
  • The level of pricing and volume instability impacting revenue.
  • The level of lost revenue and cash flows (including the effect of rebates, allowances, and refunds).
  • The impact of foreign exchange fluctuations (including the impact of hedging arrangements, if any).
  • Customers finding other sources of supply during the COVID-19 and not returning.
  • The ability of the business to operate during COVID-19 restrictions and suitability of business post COVID-19.
  • Increase in operating cost/ cost of supplies due to restrictions during COVID-19 and additional cost, if any, post COVID-19.
  • Changes in raw-material pricing due to limited source during COVID-19 and its subsequent effect on projected gross margin level.
  • The cost connected with the temporary suspension of operations.
• Evaluation of liquidity measures (operational and funding)-
  • The risk relating to receivables.
  • Impact of trade financing products like a letter of credit, payment terms, etc.
  • Impact of COVID-19 on refinancing risk.
  • Risk of contingent liabilities.

The going concern assumption from the managements perspective should be regularly updated during the COVID-19 depending upon the industry in which the entity operates, the support provided by the local government, customer’s ability to continue in business and pay the bills, availability of funding source, regulatory restrictions/ relaxations, etc. Following are some source of information that may be used to measure the reasonableness of the going concern assumption-

• Industry or analyst report.
• Third-party study.
• Data available from the WHO (World Health Organization) or authorized local institutions about the country’s expected development of the COVID-19 outbreak.
• Data available from the governmental sources regarding severity and estimated duration of economic downturn and probable action from the government to lessen the effect.

Impact on auditor’s responsibility and auditor’s report

Auditor’s responsibility- Evidently, on account of the COVID-19 outbreak, there would be a significant increase in events and conditions that may cast doubt on an entity’s ability to continue as going concern. Hence, the auditor is expected to carry out additional audit procedure to evaluate management’s assessment towards going concern. Connectively, some of the additional auditor’s responsibility are summarized hereunder-

• The auditor should evaluate the management’s plan for future actions, and its feasibility thereon, with regard to its going concern assessment.
• The auditor should be alertly considering the consequences of known or expected events that are likely to occur after twelve months from the end of the reporting period.
• In order to evaluate the management plans, the auditor should carry out a discussion with the management regarding their plans to liquidate assets, reduce/ defer expenditure, borrow money, restructure debts, increase ownership equity, etc.

Auditor’s report- The COVID-19 outbreak vis-à-vis going concern assumption would impact the auditor’s report as follows-

Situation	Auditor’s action
In case the financial statement is prepared using the going concern basis of accounting, however, as per auditor, the same is inappropriate.	The auditor is required to express an adverse opinion.
In case the financial statement is prepared using the going concern basis, which is appropriate, however, there is material uncertainty that has been adequately disclosed in the financial statement.	The auditor is required to express an unmodified opinion. Further, the auditor’s report should include a separate section ‘Material uncertainty related to going concern’.
In case the financial statement is prepared using the going concern basis, which is appropriate, however, there is material uncertainty that has not been adequately disclosed in the financial statement.	The auditor is required to express a qualified or adverse opinion.

Disclosure requirement from COVID-19 perspective

The disclosure requirement will factually differ depending on the facts and circumstances of each entity. However, the following disclosure should be provided from the outlook of COVID-19-

• Disclosure of fact of uncertainty – in case the management has significant doubt about the entity’s ability to continue as a going concern, even if it concludes that no material uncertainty exists.
• Disclosure of fact of an entity’s ability to continue as a going concern subjective to material uncertainty – in case there exists any material uncertainty.
• Disclosure of change, if any, relating to the financial risk like liquidity risk, credit risk, price risk, currency risk, etc.
• Additional disclosure, might be needed, in case the COVID-19 has been affected the cash flow from operations or the ability to access cash.