ICAEW and ICAS publish SME going concern guidance

19 May 2020: company directors are still required to assess whether their business is a going concern when drawing up their annual accounts, according to new guidance written to assist small and medium-sized businesses affected by coronavirus measures.

ICAEW and the Institute of Chartered Accountants of Scotland (ICAS) have published free-to-access guidance to assist the many owners and directors of SME businesses to assess the prospects of their business over the next year as they prepare their accounts in the wake of COVID-19.

Owners and company directors are still required to assess whether their business is a going concern when drawing up their annual accounts, and this should cover at least the following 12 months. But given the dramatic effect coronavirus has had on the performance and prospects of many businesses, leaving some under threat, accounts will have to reflect the impact of the coronavirus crisis.

The publication, which can be accessed in full here, explains to business owners and directors the importance of forecasting cashflow and how to reflect the impact of COVID-19.

One section headed “How do I reflect the impact of COVID-19 in my cashflow forecast when there are so many unknowns?” states that unless a business has seen no noticeable difference in trading due to the virus, directors or owners will need to adjust the expected cash inflows and outflows to take account of the changes in circumstances. They should consider issues specific to their sector or business (for example, any threats to the supply chain and the timing and manner in which the business emerges from lockdown) as well as the broader economic environment (for example, the downturn in demand generally and the ability of customers to pay debts when due).

“This is not a precise science,” states the guide, “but make a note of any assumptions that you have made and apply the assumptions consistently. For example, a reduction in turnover will also lead to a reduction in some (but probably not all) of your costs.

The guidance also advises owners or directors to bear in mind that they may not be able to charge the same price for their products and services, and some costs may have risen.

“Keeping track of any assumptions (and on what they are based) will be helpful when providing evidence to your accountant or your auditor to support your conclusions. It may also be useful in the future when revisiting the forecast to take account of any new information that comes to light.”

Additionally, the guidance provides suggestions on how to work with auditors and accountants during the pandemic, including the need to provide evidence which shows that conclusions reached regarding going concern are reasonable.

Commenting on the publication of the guidance, ICAEW Chief Executive Michael Izza said that the freely-available guide “will help small businesses make those forecasts and identify key issues to consider.”

Bruce Cartwright CA, Chief Executive of ICAS, stated: “accounts must always give a ‘true and fair view’ of the financial performance and position of the business. In the current circumstances that may well necessitate the inclusion of a number of additional disclosures relating to going concern in the notes to the accounts to enable stakeholders to understand the impact that COVID-19 has, or may have, on the business.”

In the coming days both Institutes will also publish more detailed guidance in this area for those preparing the accounts of larger businesses.

In the coming days, both Institutes will also publish more detailed guidance in this area for those preparing the accounts of larger businesses.

The PDF guide ‘COVID-19 and going concern: guidance for directors of SME businesses’ can be downloaded free by clicking here.