’Going concern’ standard revised – what this means for housing associations

The Financial Reporting Council has revised its ‘going concern’ standard which increases the level of responsibility on organisations' auditors. Julia Crowe, Head of Social Housing at Crowe UK LLP, explains the detail and the implications for housing associations.

In accordance with financial reporting standards FRS 102 and IFRS IAS 1, a company's directors are required to make an assessment of the entity’s ability to continue as a going concern.

When directors become aware, in making their assessment, of material uncertainties related to events, or conditions that cast significant doubt on the entity’s ability to continue as a going concern, the organisation must disclose these uncertainties. Crowe UK has produced guidance on this to support boards, audit committees and management in making this assessment.

While this remains a requirement, The Financial Reporting Council (FRC) has revised ISA (UK) 570 Going Concern which significantly extends auditors’ responsibilities. This is in response to recent enforcement cases and well-publicised corporate failures.

This means that there will be a shift from a perspective whereby an entity is a going concern unless there are indications to the contrary, to a position where directors need to show that the entity is a going concern and actively consider any factors that may cast doubt on this. Auditors are now required to demonstrate greater challenge of this assessment.

Key changes

The key changes to the standard are:

• Enhanced risk assessment procedures.
• Prescribed procedures that must be performed in relation to forecasts.
• Greater scrutiny required of the adequacy and completeness of supporting information used to produce management’s assessment relating to going concern.
• A greater emphasis on the appropriateness of disclosures made by management, even in instances where there are no material uncertainties related to going concern.
• Procedures to be performed to identify and evaluate risks of management bias.

In addition, auditors are required to make a positive statement that they have not identified any material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the entity's ability to continue as a going concern.

The unprecedented level of uncertainty as a result of the coronavirus pandemic has prompted the FRC to recommend that auditors consider early adoption of all or part of the revised standard (originally due to be effective for audits of financial statements for period commencing on or after 15 December 2019).

The FRC Financial Reporting Lab team has also released guidance, Reporting in times of uncertainty, which highlights some of the key considerations in relation to going concern for companies (but also of some relevance to housing associations) as well as providing examples of current disclosure practices.