International Financial Reporting Standards (IFRS) are more than adequate to assess a company’s going concern and their liquidity risks, although some tweaks are needed, says ACCA (Association of Chartered Certified Accountants) in its response to the Financial Reporting Council’s (FRC) Sharman Inquiry.
The FRC’s Sharman Inquiry was seeking views about whether any lessons could be learned from the financial crisis with regards to IFRS and going concern.
The going concern assessment means managers and auditors have to consider for any financial report whether it is reasonable to assume the business is sustainable and will still be around in a year’s time. The assessment of liquidity risks is about how certain it is that a company will be able to meet its liabilities as they fall due.
ACCA believes that financial statements that are compliant with IFRS provide a great deal of information which should be relevant for investors and others to assess a company’s financial health in this way. However a significant improvement to IFRS would be to extend the future period that needs to be considered.
"The key weakness of IFRS in the area of going concern is that the minimum look-forward period is 12 months from the balance sheet date and not 12 months from the date of approval - as in the UK regime. This is all the more significant given that there is no maximum period in IFRS after the period-end for reporting. Making this change would bring other countries up to the standard of the UK's more demanding but more realistic test," explains Richard Martin, head of financial reporting at ACCA.
ACCA notes that the financial crisis and the bail out of banks has thrown going concern and liquidity issues into the spotlight. Observers have asked what benefit the assessment can have if an entity can be classified as a going concern at the balance sheet date and yet have to declare very material levels of additional liabilities a short time later. In the recent crisis there may have been cases of failure to disclose where there are material uncertainties regarding the going concern basis. There may be a reluctance to own up to these uncertainties when the disclosure itself may increase the risk that confidence evaporates and credit may be withdrawn.
"Investors, lenders and creditors, however, have a right to this information and vigorous enforcement against directors and auditors is needed when they fail to provide it. Strengthening the policing of filing deadlines may also assist. Nevertheless it is unreasonable to expect preparers or auditors to do more than give their best estimate at the time of preparation and they cannot be expected to give a complete and ongoing assurance of the entity’s ability to withstand future shocks," concludes Martin.
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