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Preparation of Financial Statements when an Entity is No Longer a Going Concern (IAS 10)

Date recorded:

Background

In its February 2021 meeting, the Committee discussed a submission asking firstly, whether an entity can prepare financial statements for prior periods on a going concern basis if it was a going concern in those periods and had not previously prepared financial statements for those periods; and secondly, if it had previously prepared financial statements for the preceding period on a going concern basis, whether it is required to restate comparative information in respect of the preceding period to reflect the basis of accounting used in preparing the current period's financial statements. The staff concluded that the answer to the first question is “no” and entities do not restate comparative information and noted that there is no diversity for the second question. The Committee members generally agreed with this conclusion.

Out of the 16 comment letters received, most respondents agreed with the analysis and conclusion in the tentative agenda decision. Some respondents disagreed with some aspects and/or requested clarifications.

Staff analysis

In respect of the first question, some respondents were of the view that an entity should assess the going concern assumption at the end of the reporting period for which financial statements are being prepared but not when preparing the financial statements. IAS 1:26 requires an entity to assess the going concern assumption for at least 12 months from the end of the reporting period. It would be inappropriate to prepare financial statements for a prior period on a non-going concern when it is known that the entity continued as a going concern for the next reporting period. However, the staff continued to support the Committee’s analysis that an entity that is no longer a going concern cannot prepare financial statements (including those for prior periods) applying IAS 10:14. Moreover, IAS 1:25 requires management to instead make an assessment of an entity’s ability to continue as a going concern when preparing financial statements at the end of the reporting period. Also, IAS 1:26 requires an entity to take into account all available information about the future, thus the staff did not agree that the going concern assessment is limited to the next reporting period only.

 A number of respondents said that preparing financial statements for prior periods on a non-going concern basis could be impractical, requires undue cost or effort and might not provide useful information to users of the financial statements. The staff responded that considering these factors is beyond the scope of the Committee’s discussions on this matter.

In respect to the second question, no respondents disagreed with the Committee’s observations and conclusions. Some respondents said that IFRS Standards did explain why entities should not restate comparative information but the tentative agenda decision did not give the technical analysis. The staff explained that no technical analysis is included because there is no diversity and the matter has no widespread effect. Some of the respondents said the Committee’s observation about prevalent practice could be viewed as material that explains how to apply IFRS Standards. Nonetheless, the staff responded that such a statement is just reflecting what entities do, and it does not comment on what IFRS Standards require. One respondent suggested clarifying that IFRS Standards do not require an entity to provide comparative information. However, the staff said that the question itself suggested that the entity has included comparative information in its current financial statements and therefore, such clarification is not relevant.

Staff recommendation

The staff recommended finalising the agenda decision with no change.

Discussion

Only one Committee member disagreed with finalising the agenda decision as he considered that an agenda decision is not the right mechanism to answer matters which are neither widespread nor material. He commented that while the issue may be widespread for some structured entities, it is not for normal entities.

The remaining Committee members agreed with the staff's analysis and recommendation. However, there was some discussion on the drafting in presenting the second question. Although there was no analysis by the staff, some Committee members suggested mentioning that there is no requirement in the Standard to restate financial statements not prepared on a going concern basis because it is easy to interpret this from IAS 10. However, one observer commented that this may imply the staff had performed analysis on this, but in fact, the Standard has very limited guidance in this aspect. Some Committee members agreed with the caution raised by the observer. At the same time, they were comfortable with the current drafting of the agenda decision, which merely states the observation of the staff, because it is more neutral and also useful to readers of the agenda decision.

The Committee decided, by a majority vote of 13:1, to finalise the agenda decision with some changes to drafting in response to the second question.

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