Firms in receipt of such services from London Registrars as register of shareholders maintenance, registered office addresses and the preparation and submission of the annual Confirmation Statement may also be appreciative of corporate reporting guidance on the subject of going concern and material uncertainties.
Indeed, anxiety about this topic is likely to be even more pronounced amid the current unpredictability and chaos brought by the ongoing COVID-19 pandemic.
Defining ‘material uncertainties’
International Accounting Standard 1: Presentation of Financial Statements, otherwise known as IAS 1, generally requires financial statements to be prepared on a going concern basis. The exceptions to this would be if management intends to liquidate the entity or cease trading, or if it has no realistic alternative but to do so.
However, the term “material uncertainties” is not always well understood. This is especially unfortunate given the Financial Reporting Council’s (FRC) expectation that the current circumstances will probably cause more companies to disclose material uncertainties to going concern.
The term refers to certainties related to events or conditions that may cast considerable doubt on the ability of an entity to continue as a going concern. In other words, if a board foresees possible events or scenarios – aside from those that are only remotely likely to occur – that could lead to corporate failure, then the board should disclose such information.
Assessing the events that could precede corporate failure
When boards are seeking to identify such adverse events or scenarios, they may also consider what mitigating responses might realistically be open to them. Events can lead to corporate failure in part due to their timing, but also because of the scale of their adverse impact on the company and its ability to avoid liquidation.
A board assessing the potential existence of material uncertainties is advised to take account of both the uncertainty itself, and the likelihood of any realistically possible response actually succeeding in mitigating the uncertainty.
The unpredictable effects of COVID-19 have made such assessments even more difficult to make. Even at this stage of the pandemic, considerable uncertainties still exist about such factors as the extent and duration of social distancing measures, as well as how the outbreak will continue to affect both the economy and asset prices generally.
Boards will therefore need to carefully consider how these matters could impact on their company’s specific circumstances, bearing in mind their current and potential cash resources. The situation can differ greatly from one firm to the next with regard to its access to existing and new financing facilities, revolving facilities, invoice discounting and reverse factoring.
What boards must disclose
Not only should a given board appropriately disclose information on its access to and use of financing facilities like those referenced above, but it should also consider its eligibility for announced government support measures and the impact of various potential scenarios.
If the board concludes that a material uncertainty does exist, this should be disclosed in terms that are as specific to the entity as possible. Such a disclosure should be insightful on how and when the given uncertainty might crystallise, and the impact it could have on the company’s resources, operational capacity, liquidity and solvency.
Alternatively, the board may conclude that no material uncertainty exists that meets the criteria for disclosure. If, however, such a conclusion required the application of significant judgement, then this judgement should be disclosed in accordance with IAS 1, paragraph 122.
The provision of such disclosures will make it easier for financial statement users to fully understand the pressures on the company’s liquidity, viability and solvency.
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