Business Going Concern in Covid 19 Times
August 6, 2020
The Covid 19 pandemic has brought about or created a lot of uncertainty which is making it difficult for businesses to predict the future in terms of their business operations.
With a lot of lock down restriction imposed by government(s) and closure of non-essential businesses, Business Executives are worried about their company’s ability to generate sufficient cash flows to support operations. Some companies are also struggling with their debt covenant, liabilities to stakeholders (such as employees, shareholders, suppliers, vendors) and this has or is affecting companies’ ability to continue operations under the going concern assumption.
As companies contend with the economic impact of the global pandemic and the related risks, challenges and uncertainties posed, management should be prepared for heightened auditor scrutiny in areas with going concern relevance.
Although some companies, sectors and jurisdictions may be more affected by this pandemic than others, all companies across all jurisdictions need to consider the potential implications for the going concern assessment. It is clear that companies in highly exposed sectors that are experiencing declining demand, falling sales and margin is the most impacted, particular mention can be made of the travel and tourism, hospitality/ entertainment/ sport, retail and the oil industries.
It must be pointed out that a profitable business might not necessary be a going concern business, especially in periods of negative cash flows.
Going Concern is an accounting term for a company that has the resource needed to continue operating indefinitely until it provides evidence to the contrary. It is assumed that every business will continue to be in existence into the foreseeable future. Management of business need to assess the business going concern and assure its stakeholders of its continuous existence for at least the next financial year. In performing their duties, External Auditors are expected to provide assurance over the going concern of the business.
Accountants who view a company as a going concern generally believes a firm uses its assets wisely and does not have to liquidate any of its assets.
In this Covid 19 times, the going concerns of businesses need to be assess by finding answers to the following red flags questions:
- Has the business loss its major supplier or customer due to the Covid 19 pandemic? Eg. As it is the case in the hospitality and aviation industry.
- Can the business survive if this pandemic continues for the next 6 months?
- Is the business able to meet its contractual obligations without substantial restructuring or sale of asset in this Covid 19 times?
- How does the financial trends of the business look like? Is the business financials looking positive or negative?
- Can the business reinvest in new product development?
- Has work operations come to a halt due to Covid 19? Are people patronizing the goods and/or services of the business?
- Is it possible to access other sources of capital and the ability to develop a reasonable forecast?
- Has the business operation come to a halt and labor force asked to go home?
- Are there legal proceedings against the company for breach of contract or non-performance of contract?
- Are there significant deterioration in the value of assets used to generate cash flows?
Since it has been established that Covid 19 will impact on the going concerns assessment of companies, companies are required to disclose material uncertainties that Covid 19 presents that may cast significant doubt on their ability to continue operations.
Significant judgement will be required as no two entities, even if operating in the same industry, will be the same, but at the end of the day there will be one central question to answer, will the company have sufficient cash flows to meet their existing obligations and alleviate any conditions that raise substantial doubt about the ability to continue as a going concern in this Covid 19 times?
Raising additional capital through debt or equity offerings, reducing compensation, deferring planned expenditures, cost rationalization, employee layoffs or obtaining government stimulus relief are some of the strategies business executives need to deploy when faced with going concerns risk in this time of Covid 19. Companies affected by the Covid 19 pandemic should take advantage of the various stimulus packages being offered by the government and other institutions (such as the banks and other financial institutions).
A change in business operation to reflect the current situation will also go a long to manage the going concern risk the company is exposed to. Covid 19 has thought us that remote working and digitization is the way to go to survive. Innovations in the products and/ or services rendered will go help to stay afloat in time of uncertainty.
Another strategy that can be adopted to stay afloat during periods of uncertainty is to do or render better goods or services than concentrating on doing producing or rendering more goods or services. Business Executives should re-evaluate and re-prioritize everything they do. They should evaluate their business offers against current and real time needs by trying to answer the following questions:
- Is there anything that the business can start in this current situation?
- What business operations and/ or products can we stop or scaled back?
- What products or operations give us high- leverage to continue to do?
A business facing going concern risk in this covid 19 times could manage the situation by getting creative and replacing marketing efforts with unconventional, low cost, high impact activities such as launching of a customer referral program, building a social media contest for customers, making yourself and/ or business newsworthy etc.
The last but not the least strategy is for Business Executives to Look to others for support and ideas. Get in touch with your chamber of commerce and industry players for resources and latest updates. This will help share ideas with others facing the similar challenges and provide alternatives to come out best.
Even if management and auditors ultimately conclude that sufficient mitigating options are available to reduce the going concern risk to an acceptable level, and disclose them in the audit opinion and financial statements, the presence of a going concern emphasis-of-matter paragraph, based on the language of the related debt covenants, could present significant risk for a company. Management, in consultation with internal counsel and others, should carefully consider how a going concern opinion could impact their company’s ability to continue operating through the uncertain time ahead.
Would you mind doing me a favor? Share this article with someone so that the awareness about the effects on Covid 19 on the business operations with regards to the business’ going concern.
Author: (By Richieson Gyeni-Boateng, CAMS)
If you require further information on this article, please contact Richieson @firstname.lastname@example.org
Nkemnji Global Tech
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