IASB educational guidance on going concern disclosure

On 12 January 2021, the IASB issued educational material on going concern.

Download the IASB educational guidance

What is the issue?

The four page document linked above provides guidance on what needs to be considered when entities provide the going concern disclosure which is required by IAS 1. The IASB acknowledges that the stressed economic environment arising from the COVID-19 pandemic has meant entities have seen a significant downturn in revenue, profitability and liquidity, leading to questions over going concern.

Does the educational material include any new guidance?

The educational material does not provide any new guidance but has been issued to support entities preparing financial statements in this difficult environment. It is a reminder of what IAS 1 requires.

What is covered by the educational material?

The educational material looks at four scenarios:

1. No significant doubts about going concern

2. Significant doubts, mitigating actions sufficient for going concern to be appropriate. No material uncertainties

3. Significant doubts, mitigating actions sufficient for going concern to be appropriate. Material uncertainties remain

4. Intend to liquidate or cease trading, or no realistic alternative but to do so

The educational material focuses on the two judgemental areas of scenario 2 and scenario 3. It also provides guidance on what an entity should do if it is not a going concern, and refers to IAS 1 para 25, which requires an entity to disclose the basis that financial statements are prepared on if it is not a going concern.

With respect to scenario 3, given there are material uncertainties (even though going concern is deemed appropriate) reference is made to IAS 1 para 25 and 122. This highlights the need to disclose the uncertainties that may cast significant doubt on the entity's ability to continue as a going concern as well as information about the judgements made to conclude that going concern is appropriate. This would include disclosure of the events or conditions that cast doubt over the entity’s ability to continue as a going concern and the feasibility and effectiveness of management's actions or plans in responding to those events or conditions.

Going concern is also deemed appropriate in scenario 2, in this case where there are no material uncertainties. Reference is made to the IC Agenda Decision in 2014 which concludes that when mitigating factors are in place, and a conclusion that there are no material uncertainties, such conclusions would involve significant judgement requiring disclosure under IAS 1 para 122.

As with all situations when close calls are made, the educational material highlights that IAS 1 paras 125-33 require an entity to disclose information about assumptions made about the future, where there is a significant risk of a material adjustment to the carrying amounts of assets and liabilities in the following year.

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