IAS 1 — Disclosures requirements about assessment of going concern

Date recorded:

At a previous meeting, the Committee considered a request to clarify the disclosure requirements in IAS 1 Presentation of Financial Statements when management is aware of material uncertainties about the entity’s ability to continue as a going concern.

The Committee tentatively decided that the questions of when and what to disclose about these uncertainties should be addressed as a narrow-focus amendment to IAS 1. The Committee tentatively agreed:

  • The high threshold for preparing financial statements on a basis other than going concern is appropriate;
  • A threshold for the disclosure of material uncertainties should be identified more clearly in IAS 1;
  • IAS 1 should include objectives for this disclosure; and
  • The staff should prepare a proposal about what specific disclosures should be required.

At this meeting, the staff presented a proposed draft amendment to IAS 1 (as included in the Staff Agenda Paper).

Committee members expressed many reservations regarding the proposed draft. Particular concerns were raised regarding paragraphs 25A, 25D, 25F and 25H of the proposals. In particular:

  • Paragraph 25A introduced the concept of requiring management to assess an entity’s ability to continue as a going concern ‘for the foreseeable future’. Several Committee members believed the foreseeable future concept should link more closely to the requirements in IAS 10.
  • Paragraphs 25D and 25F discuss the identification of material uncertainties, with the latter outlining indicators of possible material uncertainties. Many Committee members believed that paragraphs 25D and 25F should be eliminated. Regarding 25F, many expected significant practical issues with including indicators either on the basis that they did not necessarily view the proposed indicator as indicative of a going concern risk (e.g., discontinuance of some operations) or anticipated the indicators would be viewed in practice as a rebuttable presumption of a going concern risk. Others were fine with the indicators, but believed they should be characterised as examples or included in Implementation Guidance.
  • Paragraph 25H discusses required disclosures when material uncertainties are identified with respect to an entity’s ability to continue as a going concern. Many Committee members failed to see the linkage between paragraphs 25G and 25H and saw paragraph 25H as unnecessary, although others saw 25H as necessary to avoid boilerplate disclosures.

Committee members also asked more general questions including whether the identification of material uncertainties should be assessed on a gross (excluding the impact of any mitigating factors) or net basis, to which the staff responded that the expectation was gross, as well as whether the disclosures should be required only when material uncertainties are identified (as proposed by the staff), or instead, an entity should be required to specify when accounts are prepared on a going concern basis and the judgements made and assumptions used in making that assessment.

After a lengthy debate, the staff suggested a practical way forward may be to expose the larger subset of proposals (i.e., retain all of the above paragraphs in an exposure draft) in order to receive constituent views. Following this feedback, the staff would consider the best route forward. However, prior to exposing, the staff noted an intention to take on-board many of the comments expressed by the Committee, including (1) referring to paragraph 25F as examples instead of indicators and (2) asking specific questions in the exposure draft regarding the usefulness of paragraphs 25F and 25H.

In the staff paper, the staff also asked the Committee for its views on whether the proposed amendment should be extended in order to align the quoted going concern assessment timeframe in IAS 1 (i.e., at least 12 months from the end of the reporting period) with that of International Standard on Auditing (ISA) 570 Going Concern (i.e., at least 12 months from the date of the financial statements). The staff did not recommend aligning the going concern assessment timeframe.

Several Committee members supported harmonising the going concern assessment timeframe as they saw value in the information it would provide to users of the financial statements – especially in circumstances in which financial statements are issued substantially after year end. These Committee members also saw benefits in auditors and management assessing going concern on a consistent basis. However, other Committee members did not support harmonising the going concern assessment timeframe for reasons including that such a proposal is beyond the scope of the issue the Committee is intending to address as well as a view that IAS 10 requires a continuous going concern assessment anyway.

When put to a vote, the Committee could not reach a consensus on whether it preferred to harmonise the going concern assessment timeframe. The Committee Chair recommended that the Committee expose the staff recommendation (retaining the timeframe as at least 12 months from the end of the reporting period) and ask for constituent views. Committee members tentatively agreed with this path forward.

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