Question

IAS 1 Presentation of Financial Statements requires management to assess a company’s ability to continue as a going concern. The going concern assessment needs to be performed up to the date on which the financial statements are issued. The assessment relates to at least the first twelve months after the Statement of Financial Position date, or after the date the financial statements will be signed, but the timeframe might need to be extended.

Material uncertainties, for example, the coronavirus effects that cast significant doubt on the company’s ability to operate under the going concern basis need to be disclosed in the financial statements. It is highly likely that many companies large and small, and particularly in certain sectors, will have issues relating to the coronavirus that need to be considered by management. There will be a wide range of factors to take into account in going concern judgments and financial projections including travel bans, restrictions, government assistance and potential sources of replacement financing, financial health of suppliers and customers and their effect on expected profitability and other key financial performance ratios including information that shows whether there will be sufficient liquidity to continue to meet obligations when they are due.

Answer 1

IAS Presentation of financial statements-

The management has been given the responsibility to assess the going concern assumptions for the upcoming 12 months from end of reporting period.

The management is required to asses the liquidity and source of finance available to entity based on it's balance sheet liquidity position and relations with lenders of company,Suppliers, goodwill of company in market.For this management may do some extra analysis based on information available and the management should also consider the economic stimulas if any ( in case the situation like coronavirus pandemic ) provided or to be provided by government of various countries.

If there seems a uncertainity on long term viability of company's ability to move forward but ,for upcoming 12 month the finance is available then company is required to make disclosure about the uncertainity in long term and future course of action (if any) in the notes to accounts.

If there seems , neither liquidity is available nor there is any source of finance then, company is required to prepare financial statement based on realisation values of asset and settlement values of liabilities and other disclosures are also required.

In the given situation-

a) Airlines Company-- In the current pandemic, airlines company's are the one which has been significantly impacted. Almost all the countries has imposed the lockdown in their countries,which has impacted domestic travel restriction and international travels has also been banned in all the countries.

The impact of this can be seen in earning of airlines company for atleast 2 quarters,however situation may be changed but in stagnation basis.

The current reserves,which company posses has been decreasing in the shape of fixed cost since the start of pandemic.The airlines company's which were already in economic dilemma, has been hardly hit by this.

The management of company should concern between them and check their current liquidity position and way forward after pandemic. The management is also required to discuss with the lenders of company if company's reserves has been exhausted.The management is required to make a blueprint for upcoming period because it take time to be back on track.

The management should also be aware about the economic stimulas provided by government.They should consider whether there is something for them in the stimulas or not.They should make all the strategy and plan after considering all the facts relating to all stakeholders like supplier providing credits, lenders providing finance, employees accepting paycuts, goverment providing some stimulas and easying certains compliances and restrictions.

In my opinion, the airlines company were already struggling and after this pandemic, survival of such company is in danger. As a Auditor, you should be aware about the general guidlines provided by Auditors bodies with respect to reporting of entities. If there seems no option for availabilty of finance and liquidity then going concern assumption will be impacted and accordingly decisions of reporting will have to be taken.As a Managment, they should discuss all the matters with all the stakeholders like suppliers, lenders, employees, government for any future course of action.

b) Pharmaceuticals company- These are the company, which has been one of the most positively impacted by this pandemic.There profits has been soaring [ in case of company's manufacturing drugs used in coronavirus treatment]  and reserves is increasing.With respect to assessment of going concern and effects of pandemic, the management of these types of company should not be worried.They will have to assess based on existing informations.

Comment- In the current pandemic business may see deep trouble in general, but the business which largly depends on public footfalls are going to face some extra problems.

Please provide your valuable feedbacks,you may also comment on the comment section of question for any query or explanation pertaining to question.

thanks,

Answer 2

Advise to Airlines company: In view of the lockdowns deployed by various countries, the airlines is completely at standstill as of now & again the same is a very capital intensive business, since majority of the airlines are taken on a lease or loan or financed via debt. The financing of the airlines needs to be checked and see if the finance costs and other running costs are eating into the capital of the company to such an extent that it will impact the continuing operations.Going concern means whether the company is in a position to run its operations or will be running its operations after one year from the statement date and there should be some material indication existing which suggests that the company will not continue its operations - like huge financial and operational losses eating into capital, huge lender dues which are outstanding for a long terms, multiple high value ligitations where company is expecting a defeat, loss of substantial market, government regulation w.r.t. operation etc. As to in case of airlines each of these needs to be looked into by an auditor in details and comment on the going concern assumption for the airlines. Here the growing finance costs, outstanding dues and the lenders approach to airlies would be a key factor, which needs to be analysed by the management.

Advise to pharmaceutical industry: The Covid situation has had limited impact on the pharmaceutical industry as the demand for medicinal supplies has not reduced if not increased. The sales trend for its key products and the costs needs to be analysed, as well as the receivables and payables health. The governments policy regading production, sale, manufacturing or export of certain medicines might have an impact as well - these need to be analysed if it is going to have a material impact, which will jeopardise the going concern principle for the pharmaceutical company. Moreover if the pharmaceutical company was sourcing its key raw materials from a particular country then it can even have a widespread impact, for which the location of vendors, vendor health and government policy w.r.t. import of certain medicines or from a certain country needs to be analysed.