Financial statements: going concern considerations

For most businesses, an assumption exists that they will continue for the foreseeable future. This makes them a “going concern”.

Under Australian Accounting Standards (AASB 101), management must be able to reasonably conclude it is appropriate to prepare financial statements on a going concern basis. This standard applies to all companies required to prepare financial statements by the Corporations Act.

In making a going concern assessment, if management are aware of material uncertainties (events or conditions that may cast significant doubt upon the company's ability to continue as a going concern), those uncertainties are required to be disclosed in the financial statements.

This disclosure becomes more important in a period of economic downturn. When making financial announcements, management are required to publish statements about the assumptions they have made. In the current environment, there is an increased need to inform users about the nature of such information. Management will need to address these reporting challenges early within their timetable for preparing the annual report and accounts to help avoid any last minute problems which could cause adverse investor reaction.

For financial reporting purposes, the assessment of going concern is made on the date that management approve the financial statements. Management have three potential conclusions:

• there are no material uncertainties and therefore no significant doubt regarding the entity's ability to continue as a going concern
• there are material uncertainties and therefore there is significant doubt upon the entity's ability to continue as a going concern, thus giving rise to the potential for additional disclosures under IAS 1
• the use of the going concern basis as not appropriate

Depending on which conclusion management reach, the wording can be complex and difficult to compose. If going concern might be an issue for your company, you should endeavour to build extra time into your reporting schedule to address it.

For assistance and guidance with complex financial reporting requirements such as this contact your Grant Thornton adviser to arrange a consultation.

Author, Keith Reilly, March 2009

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