Milton Segal | Senior Executive | Corporate Reporting | South African Institute of Chartered Accountants (SAICA) | mail me |
In March 2020, President Cyril Ramaphosa announced a 21-day ‘hard’ lockdown, later to be known as a level 5 lockdown. It certainly caused flutter in the financial markets, forcing almost the entire economy to cease operations and people to be confined to their places of residence.
From an accounting and reporting perspective, businesses were concerned about the going concern element within their financial reporting.
Simply put, management needed to reaffirm that their businesses would be able to continue trading for the foreseeable future without the need, desire, nor intention to cease trading or seek protection from their creditors.
Fluidity of the situation
By default, the livelihoods and those of their staff, suppliers, customers, etc. would also be factored into these considerations and disclosures.
As difficult as it seemed at the time, the saving grace potentially was that the economic modelling looked at a 21-day lockdown.
In this case, from a reporting perspective, we gained clarity from the accounting and disclosure requirements and so those COVID-19 aspects seemed to be under control. Fast forward more than 120 days later, and South Africa is still in a lockdown. That is more than 100 days past the initial 21-day announcement.
What about the assumptions management made in March and April 2020 around the going concern of their business? Surely they no longer hold true?
The answer to that is a very difficult one. The modelling and assumptions made 120 days or even 100 days ago need to be reexamined carefully.
The problem with forecasting is that it requires key indicators such as duration, cash inflows, outflows, risk and probability to be considered. The real pressure point at the moment is the fluidity of the situation which makes modelling and the ability to report on these from a financial reporting perspective very difficult.
Future cash flow forecasts impaired
Within merely weeks, we went from a situation of no alcohol sales and therefore the entire related industry being reopened and then subsequently and immediately shut down.
How would management have factored that in to their future cash flow forecasts, and impairment indicator considerations?
Simply put, they probably could not have. With no imminent end in sight of level 3 lockdown and no date determined or even suggested for when alcohol may again be sold and consumed, it is a very precarious position for management to forecast, account for and disclose.
Consider the wine farms and producers, the liquor stores, pubs, bars, restaurants and shebeens that depend on the sale of alcohol for their going concern; their ability to generate future economic benefits are now financially, economically and fundamentally impaired.
How would one even forecast the recovery, and when would it start and how would the industry recover?
For this industry, the original going concern disclosure and accounting concern has evolved significantly to growing concern; concern for whether these businesses will still be trading in the weeks and months to come.
What about other industries such as tobacco, tourism, and leisure? They have not traded for 4 months, more than half of the current year.
What assumptions would management have to make in order to report on and disclose their going concern?
That assumption is unfortunately getting easier to make – they simply will not be able to trade and therefore the going concern, International Accounting Standards 10 criteria no longer exists.
Within 120 days, many businesses have gone from a going concern, to growing concern to no longer a concern. Should we be concerned? The answer to this is an emphatic yes.
