The International Organization of Securities Commissions (IOSCO) issued a statement urging companies worldwide to provide useful going concern assessments and disclosures with the ongoing COVID-19 pandemic.
Going concern is about a company’s ability to stay afloat. In the United States, company management, under the FASB’s standard, must disclose if it is “probable” that the company will not be able to pay debts as they come due during the next 12 months. Auditors must then assess whether there is “substantial doubt” about the company’s going concern. If there is, the auditor needs to report it in the auditor’s opinion.
“In light of current uncertainty resulting from the COVID-19 pandemic, we remain fully committed to the development, consistent application and enforcement of high-quality accounting standards which are of critical importance to the proper functioning of the capital markets—especially in times of uncertainty,” IOSCO said in a March 24, 2021, statement.
The organization, an international policy forum for securities regulators around the world including the U.S. SEC, said that it is important for investors to get high-quality information about material uncertainties that may cast significant doubt on a company’s ability to continue as a going concern.
This means that companies must clearly identify any uncertainties that cast significant doubt that they will be able to continue operating, IOSCO said.
“In addition, when management has determined that material uncertainties do not cast significant doubt on the ability of an entity adversely affected by COVID-19 conditions to continue as a going concern, it is important for investors to receive complete information about the significant judgments that may have been exercised in arriving at management’s determination,” the organization stated. “This is particularly the case in situations where judgments about the ability of management to execute plans to mitigate the effects of material uncertainties are important to the conclusion that there is not significant doubt about the entity’s ability to continue as a going concern.”
IOSCO said that it is issuing the statement because going concern problems are likely to be relevant for a larger number of public companies for 2020 and 2021 financial reporting periods in many countries.
Moody’s Investors Service in a recent research said that there has been an increase in going concern disclosures in the U.S. as companies experienced decreased income or disappearing revenue. In many cases, they were directly related to the pandemic’s effect on upcoming principal payments or projected violations of financial covenants.
In the statement, IOSCO also emphasized the importance of the auditor’s role in evaluating management’s going concern.
The international panel of securities regulators reminded auditors that follow international audit standards of their responsibilities to report on key audit matters (KAMs), which are matters that require significant attention. In the U.S. the PCAOB requires auditors to provide critical audit matters (CAMs), which are similar to KAMs.
IOSCO said that the current environment may result in the inclusion of significant audit matters regarding going concern. In some cases, auditors would conclude that the auditor’s report should contain a separate section related to material uncertainty related to going concern.
“It should also be noted that the auditor should express a qualified opinion or adverse opinion, as appropriate, if adequate disclosure about the material uncertainty is not made in the financial statements,” IOSCO said.
“Many securities regulators plan to continue to focus on the enforcement of recognition, measurement and disclosure requirements in accounting standards during these critical times of economic disruption, including going concern disclosures,” IOSCO added.
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