The Covid-19 pandemic has significantly altered the operating environment for many businesses, and numerous businesses are threatened with closure, particularly small and medium-sized enterprises (SMEs).
In this article, we explain why it is important to assess a going concern and the viability of a business when considering the presentation of accounting accounts, and some factors to consider when conducting such an assessment.
1. Why is presenting accounting data for this year relevant to the going concern strategy for the following year?
Accounting accounts are typically considered records of transactions from the previous year, and account balances are a snapshot of what a business owns and owes at the end of the year. However, many accounting items are measured and classified based on the assumption that the business will continue operating for the foreseeable future (12 months). If the business ceases operations, these accounts must be measured and classified on a different basis, according to the going concern principle. Therefore, based on the actual state of the business's operations, accountants must choose the appropriate method for presenting financial statements.
2. Is an assessment of the business's viability necessary?
Absolutely, because this assessment primarily determines whether the SME's financial statements are presented as a going concern or a going concern during the Covid-19 pandemic. This assessment also reflects the company's operational plans for the next 12 months.
Financial statements are typically prepared on a "going concern" basis. Therefore, if it is determined that the business will not be able to operate for the next 12 months, such as if there is an intention to liquidate the business or cease trading, or if there are no other practical alternatives, then the financial statements should be prepared on a "non-going concern" basis.
The review must take into account all available information regarding the future, including at least 12 months from the date the financial statements are approved and signed by the directors. There is no specific procedure for this review, but in uncertain times such as the period affected by COVID-19, business leaders need to develop appropriate action plans and clearly state the feasibility of those plans in the future, rather than just thinking about them.
3. How can SMEs do that?
Unless it's business as usual, SMEs will need to adjust projected cash inflows and outflows to account for changes in circumstances, considering issues specific to each sector and business during Covid-19 (e.g., any threats to the supply chain and the timing and manner in which business operations emerge after shutdown) as well as the broader economic environment (e.g., the decline in overall demand and the ability of customers to repay debts when due).
Here are some factors to consider. It's not a comprehensive list, and every business is different, so try to think as broadly as possible.
- Revenue and accounts receivable – note that you may not be able to transact at normal levels and customers may have difficulty paying on the usual terms.
- Payments to suppliers and utility providers – some costs may be reduced while business operations are being scaled back, but others may increase due to supply chain disruptions.
- Employee costs – you will need to account for any changes in employee levels and associated employee expenses such as commissions, bonuses, national insurance, and pension contributions.
- Taxes – tax support policies, extensions of payment deadlines, and deferrals help improve cash flow for businesses.
- Short-term and medium-term business strategy involves conducting a SWOT analysis of the strengths, weaknesses, opportunities, and threats that the business faces and its ability to adapt to changing circumstances, thereby formulating appropriate operational policies.