Going concern assumption in the corona crisis – stricter requirements for legal representatives
Going concern assumption and responsibilities
As long as there are no legal or factual obstacles, law requires that annual and consolidated financial statements be based on the going concern assumption. In light of the good economic situation in recent years, the going concern assumption was not a frequent issue in the preparation and auditing of the accounts of German companies. However, the massive restrictions in private and business life to ward off the corona pandemic increasingly lead to the question of whether the going concern assumption should be maintained as the central basis of accounting.
The company’s legal representatives are responsible for preparation and documentation of the going concern forecast as the basis for the annual or consolidated financial statements.
Obstacles to continuation
Legal or factual circumstances which frequently (and especially during the corona crisis) prevent the continuation of business activities are insolvency or the threat of insolvency. The legal representatives have a duty to prevent insolvency, which in times of the corona crisis leads to increased demands on legal representatives.
Documentation of the going concern forecast
Before the corona crisis, it was common practice to assume continued existence if the following three conditions were met:
- Sustainable profits in the past
- Easy access to financial resources
- No threat of balance sheet overindebtedness
Even in the past, this predominant consideration of the past and/or of the actual state of affairs had to be supplemented by a future forecast. When applying the going concern assumption, which was the default condition, the question usually asked was whether the company could still be expected to operate within the next twelve months.
That being said, it was not uncommon for this future assessment to be carried out on a very general basis, which was certainly sufficient in the large number of cases where business operations were running steadily. However, there should be general consensus today that in view of the economic consequences of the corona pandemic, much more weight should now be attached to a future-orientated approach. A projection of the future with regard to the going concern assumption must be made and documented in (almost) every annual financial statement that is to be prepared for the balance sheet dates after 31 December 2019. In times of corona, an assessment based on data from the past is no longer sufficient.
Financial plan
Against the background of threatened solvency as a key criterion – not only, but especially in the corona crisis –, a finance plan regularly represents the central element of the going concern forecast. Ideally, the finance plan is part of an integrated overall plan for the new fiscal year. It should be continuous rolling financial planning in the sense of liquidity planning. The first days and weeks must be planned in detail, day by day or week by week. At the end of the planning period (twelve months), more aggregated planning on a roughly monthly basis is then sufficient against the background of increasing uncertainty.
Liquidity planning is always an important task of corporate management. It is indispensable in times of crisis, as insufficient liquidity can threaten a company’s existence. Furthermore, a finance or liquidity plan with an at least medium-term horizon is required, for example, when applying for public loans to cope with the effects of the corona pandemic, for instance, from KfW Bank.
Conclusion
As a result of the corona crisis, the going concern assumption in commercial balance sheets represents a major hurdle in the context of preparing financial statements. The worldwide lockdown of economic activity raises the going concern question for many companies. The fact of the worldwide crisis situation therefore increases the requirements for a positive going concern forecast for legal representatives.
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