Impact of COVID-19 on financial reporting: going concern assessment
COVID-19 has had a major implications for a number of sectors, such as hospitality and retail. Companies in these sectors may have severe liquidity problems. This raises the question whether these companies will be able to keep their heads above water for at least the next 12 months after year end. When making an assessment, all available information about the future is taken into consideration. This includes for example current and expected profitability, debt repayment schedules, potential sources of replacement financing, etc. Also currently published emergency support measures are taken into consideration. However, emergency measures which have not been published yet cannot be taken into consideration.
For the NOW and the TVL for example, additional support measures have been published for the first and second quarter of 2021. You may take these additional emergency measures into consideration if it is probable that you will meet these requirements.
However, at this moment it is not certain if emergency measures will be published for the second half of 2021, therefore you cannot anticipate on receiving these emergency measures for the second half of 2021, and should not include these in your going concern assessment yet.
The following scenarios are conceivable:
1) Uncertain but not impossible to continue as a going concern
If you assess that it is probable that you will have sufficient cash the next 12 months to continue as a going concern, and that you don’t need any additional support from third parties (e.g. the bank, or crowd-funding), then you disclose this uncertainty about going concern in a positive way.
You disclose that, based on the measures taken and additional corona-related support measures you have or will receive, it is probable that you have sufficient cash to continue as a going concern for the coming 12 months.
NB both the corona-related support measures 2020 and already published support measures 2021 are taken into consideration.
2) Material uncertainty to continue as a going concern
If your liquidity position has plummeted to such a low level that it is not certain whether you will keep your head above the water in the coming 12 months (i.e. you expect that without further additional support it is not probable that you will continue as a going concern), then there is material uncertainty to continue as a going concern. Only with additional support which you do not have at the date of preparation of the financial statements, can you can continue as a going concern.
In that case, you disclose that there is material uncertainty to continue as a going concern. You disclose which measures you have taken, and which additional support measures (both 2020 and already published support measures 2021) you have used or will make use of. You conclude that it is nevertheless materially uncertain if you have enough cash forin the coming 12 months in order to continue as a going concern.
3) Discontinued operations
If you conclude it is inevitable that the company will collapse in the next 12 months, either by choice or because it has no realistic alternative but to do so, then you need to prepare the financial statements based on liquidation principles (discontinued operations).
If this occursis an event after year end, and the decision to liquidate the company or event takes place when you are preparing the 2020 financial statements, then also you have to prepare the 2020 financial statements based on liquidation accounting principles.
In practice, it is common to start the 12 month period from the date the financial statements are authorisedprepared (and an auditor’s report has been issued) instead of year end reporting date.
If you have any questions about the going concern assessment or about how to account for the impact of corona in your financial statements, please feel free to contact our specialists.