How are uncertainties dealt with in financial statements?

The Covid-19 outbreak and the actions taken by the South African Government and other governments around the world have created a state of uncertainty. The exceptional steps taken by Government to lock down the country have affected all entities and their ability to remain a going concern through no actions of their own.

In terms of the accounting frameworks, IFRS and IFRS for SMEs, management has to make an assessment of the entity’s ability to continue as a going concern for at least twelve months after the year end date. Normally this is a simple exercise, however Covid-19 has created an exceptional situation, which means that entities need to assess their Business Continuity Plans in light of the Covid-19 pandemic and assess their operational ability including their cashflows in these uncertain times.

In assessing whether the going concern assumption is appropriate, management takes into account all available information about the future. Currently the future is uncertain as there no information available as to when and how the current situation will end and when and if conditions will return to “normal”.

When management is aware of material uncertainties, as highlighted above, related to events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern, the entity shall disclose those uncertainties, this is disclosed by way of a note in the financial statements.

The auditor’s responsibility is to conclude on the appropriateness of management’s use of the going concern basis. If a material uncertainty exists, as is currently the situation, the auditor is required to draw attention in the auditor’s report to the note in the financial statements regarding the uncertainty. This is done by means of an Emphasis of Matter paragraph in the audit report.

If management does not disclose the uncertainty regarding going concern in the financial statements, the auditor is required to modify the audit opinion. A modification is either a qualified, disclaimer or adverse opinion.

An Emphasis of Matter paragraph does not modify the audit opinion but only highlights uncertainties to the users of the financial statements.

A similar responsibility rest with the independent reviewer of financial statements.

If you require assistance or clarification re any of the above, please don’t hesitate to contact one of our PKF Octagon Partners.

Prepared by Brigitte Schutte : Head of Risk, PKF Octagon