| Addressing diversity in presenting information on going concern |
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The Standards of GRAP currently require disclosures of material uncertainties that may cast significant doubt upon an entity’s ability to continue as a going concern (hereafter referred to as “material uncertainties”). But these disclosures are mostly lacking from financial statements.
Due to the current state of the economy, along with increases in funding requirements, going concern assessments are more important than ever. To address the lack of information presented in the financial statements on going concern and its assessment, the Accounting Standards Board ( ASB) issued ED 198 on Amendments to GRAP 1 on Presentation of Financial Statements. ED 198, which proposes: - explaining when preparing financial statements on a going concern basis is inappropriate; and
- additional disclosures that require management to explain its reasoning and judgements in assessing going concern.
Additional guidance proposed on the application of the going concern basis
Financial statements are normally prepared on the assumption that the entity is a going concern and will continue in operation, or some modified form. From time to time, decisions are taken to liquidate or cease the operations of an entity, or to transfer or merge its functions.
These decisions are governed by legislation or a decision by an appropriate authority, such as a municipal council, board, council or equivalent.
If a decision is taken to liquidate an entity, to cease its operations in its entirety, or when there is no realistic alternative but to do so, preparing financial statements on the going concern basis is inappropriate. This is because all the functions and operations of the entity will cease.
The going concern basis remains appropriate where a decision is taken to transfer some, or all of an entity’s functions to another entity, or to merge one or more entities as the entity will continue to operate in a modified form.
Proposed disclosures on going concern and material uncertainties
GRAP 1 currently requires the disclosure of material uncertainties related to events or conditions that may cast significant doubt upon an entity’s ability to continue as a going concern.
ED 198 proposes that the financial statements should provide information about the significant judgements and assumptions made by management when assessing going concern. To the extent that management is aware of any uncertainties, information should also be provided about: - the events or conditions that give rise to these uncertainties;
- their possible effects; and
- management’s plans to address the events or conditions that resulted in uncertainties, along with actions to mitigate the effect of these events or conditions.
These disclosures should be presented in the notes the financial statements. A cross reference can be included in the notes if information about management’s plans to address uncertain events or conditions, and their actions to mitigate their effect, are included in another document that is published with the financial statements.
Addressing practical questions on going concern
The Secretariat of the ASB will issue two Fact Sheets to address practical questions relating to going and disclosing material uncertainties. The Fact Sheets will also provide guidance on considerations when the financial statements are prepared on a basis other than going concern.
Send us your comment on ED 198
ED 198 was issued by the ASB in April 2022 with comment closing on 15 July 2022. The ED can be accessed on https://www.asb.co.za/ed-198/ and comment can be submitted to the Secretariat of the ASB at info@asb.co.za.
The Secretariat will also be hosting discussions during May 2022 to obtain comment and views from stakeholders on the proposals in the ED. If you are interested in joining these sessions, please contact amandab@asb.co.za. |
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