The Coronavirus: Reconsidering the Going Concern Principle

March 18, 2020 | Blog

In our blog “Coronavirus COVID-19: how your business can weather the storm”, we laid out some aspects for businesses to consider and additionally provided some guidance as to how company officers can prepare during these uncertain times amidst the outbreak of the coronavirus. This blog outlines the going concern principle of an auditor's report in accordance with Dutch law.

The going concern principle

Under this Dutch legal concept, continuation of an entity as a going concern (ongoing business) is presumed as the basis for valuation of a company’s assets and liabilities (Section 2:384(3) Dutch Civil Code). The entity is presumed to be able to continue to engage in its business activities for the foreseeable future without the threat of insolvency or a cessation of all business operations. Accounting principles require an entity's board to assess the continuity of its activities when preparing the annual accounts. Thus, the going concern assumption is the board's (and not the auditor’s) responsibility.

The going concern assumption is applied to financial statements unless the assumption is incorrect or there is serious doubt as to its validity, in which case this must be disclosed in the emphasis of matter paragraph of the auditor’s report, stating its effect on the net assets and results.

Auditor's report

The auditor is expected by law to obtain sufficient and suitable evidence to evaluate/audit the going concern assumption applied by the entity's board. The auditor has the responsibility to perform his work with due observance of specific regulations and standards, known as the NV COS.

When preparing the annual accounts, an entity's board is required to assess the entity's ability to continue as a going concern (NV COS Standard 570). The following situations may present themselves:

  1. If there is reasonable certainty about the entity's ability to continue operating, its assets and liabilities are valued on a going concern basis.
  2. If the auditor has substantial doubt as to whether an  entity has the ability to continue as a going concern, its assets and liabilities are still valued on a going concern basis, but  the auditor will include an emphasis of matter paragraph in his or her report reflecting their   Substantial doubt about an entity's ability to continue as a going concern arises when the auditor believes the entity will be unable to meet its obligations though its current operations (see Guidelines for Annual Reporting [Richtlijnen voor de Jaarverslaggeving, or RJ] 170.302). If the auditor is uncertain, as to whether he will obtain sufficient cooperation from the relevant stakeholders, but nonetheless believes there is a realistic probability that the entity's operations can continue, the annual accounts are prepared on a going concern assumption (RJ 170.302).
  3. If and when an entity's discontinuation is certain and its balance sheet will show a deficit, the financial statements are prepared under the liquidation basis of accounting.
Coronavirus: Reconsidering the going concern principle

Events that occur after the balance sheet after the close of the fiscal year may give rise to serious doubt about an entity's ability to continue its operations. Now that the 2019 fiscal year has closed, it may be relevant to reconsider whether or not entities are accurately classified under the going concern assumption in the light of the coronavirus outbreak. This is even more crucial for entities with a going concern assumption in industries that were impacted harder by events relating to the coronavirus outbreak. An entity’s board would be well advised to prepare a detailed risk analysis and use this as a basis for a review of the going concern assumption. This is prudent because an incorrect going concern assumption or the absence of an emphasis of matter paragraph may result in personal liability of the officers and the auditor.

If you have any questions about the going concern assumption, please feel free to contact us.

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