Before the pandemic, the question which arose was will the company be able to continue its operations? Or will there be a going concern? But now the historical financials can no longer be relied upon to predict future trends such as cash flows.
There is a significant reduction in the fair value of investments and other assets. This is because of the issue relating to the going concern concept. Section134(5) of the Companies Act requires directors to state that the annual accounts were prepared on a going concern basis. ICAI(Institute of Chartered Accountants) has issued a series of advisories, FAQs and guidance reports for its members, as auditors are responsible for the evaluation of the management’s assessment.
Covid-19 doesn’t automatically translate into material uncertainty on the company’s ability to continue, states ICAI’s report, titled ‘Going Concern’, a key consideration for auditors amid Covid-19’. But, it involves regular updating of the assumptions utilized in the going concern assessment.
The ICAI report states that the management should think about the conditions within the markets & industry during which it operates, their customers’ ability to continue in business & pay bills, the support provided by local governments, the effects of social distancing, and lockdown laws. The availability of funding sources, regulatory restrictions, or relaxations during this regard should also be factored in.
Cimplyfive which provides automation solutions to compliance risk management and which is the base for good corporate governance released a model disclosure format that, if companies adopt it, would bring in better transparency for its stakeholders. The model released by the Cimplyfive covers the three broad areas of Context, Impact, and Disclosure. The impact would be assessed with some certainty. The other two elements would be solvency and sustainability on which only one opinion can be expressed at a given point in time.
The model disclosure, signed by key officials and endorsed by the board, should be one document of the company’s assessment, which should be shared with the stock exchanges and also be made available to investors on its website.
CimplyFive Corporate Secretarial Services CEO Shankar Jaganathan said that “Considering that the impact is likely to be felt in both the short and medium-term, the document should be updated when any material change occurs”.
