March 24, 2021
The International Organization of Securities Commissions (IOSCO) is the leading international policy forum for securities regulators and is recognized as the global standard setter for securities regulation. The organization’s membership regulates more than 95% of the world’s securities markets and is responsible for the oversight of capital markets and the application and enforcement of accounting standards. In light of current uncertainty resulting from the COVID-19 pandemic, we remain fully committed to the development, consistent application and enforcement of highquality accounting standards which are of critical importance to the proper functioning of the capital markets—especially in times of uncertainty.
IOSCO’s objectives include investor protection, maintaining fair, efficient and transparent markets and seeking to address systemic risks. The application of accounting standards must result in issuers providing clear, relevant and representationally faithful information to allow investors to make informed investment decisions.
The responsibility for developing and maintaining high-quality standards resides with the International Accounting Standards Board (IASB), and we welcome their recent educational material on the topic of going concern disclosures which may be particularly relevant for some companies adversely affected by COVID-19 conditions. In addition to items raised in our previous statements, this topic is likely to be relevant for a larger number of public companies for 2020 and 2021 financial reporting periods in many jurisdictions.
Implications for the preparation of annual financial statements It is important for investors to receive high-quality information about the existence of material uncertainties that may cast significant doubt on an entity’s ability to continue as a going concern. As discussed in the education material, it is important for entities to clearly identify uncertainties that cast significant doubt on the entity’s ability to continue as a going concern. In addition, when management has determined that material uncertainties do not cast significant doubt on the ability of an entity adversely affected by COVID-19 conditions to continue as a going concern, it is important for investors to receive complete information about the significant judgements that may have been exercised in arriving at management’s determination. This is particularly the case in situations where judgments about the ability of management to execute plans to mitigate the effects of material uncertainties are important to the conclusion that there is not significant doubt about the entity’s ability to continue as a going concern.
The recent IASB education material provides an overview of disclosures required in various situations. In addition, the education material discusses other overarching financial reporting disclosure requirements such as the need to provide information about the assumptions entities make about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
Implications for the annual audit We also believe that external auditors play a key gatekeeper role with their responsibility to evaluate the adequacy of disclosures and assess the appropriateness of management’s judgment about the entity’s ability to continue as a going concern, especially under the current uncertain environment. Auditors are reminded of their responsibilities to report on Key Audit Matters (KAMs), those matters that required significant auditor attention in performing the audit. The current economic environment may result in the inclusion of KAMs regarding going concern, material uncertainties and significant judgments, including a description of how the auditor addressed these matters. In other cases, there may be circumstances for which the auditor concludes that the auditor’s report should contain a separate section under the heading Material Uncertainty Relating to Going Concern. It should also be noted that the auditor should express a qualified opinion or adverse opinion, as appropriate, if adequate disclosure about the material uncertainty is not made in the financial statements. In this regard, we believe the recent IASB education material, together with material previously provided by the International Audit and Assurance Standards Board3 also provides important information for auditors, as well as audit committees, to consider.
Many securities regulators plan to continue to focus on the enforcement of recognition, measurement and disclosure requirements in accounting standards during these critical times of economic disruption, including going concern disclosures.
In conclusion, IOSCO reminds issuers, audit committees and/or those charged with governance (TCWG), and external auditors of the important role each plays in providing investors with highquality, reliable, timely, and transparent financial information, especially in times of heightened uncertainty. It is the responsibility of management to develop well-reasoned and supportable estimates and provide reliable financial information about the current and potential future effects on the issuer from COVID-19 conditions. Audit committees and/or TCWG are responsible for oversight of the issuer’s financial reporting and the external audit process. And, it remains the responsibility of the external auditor to perform high-quality assurance services in accordance with professional standards on the financial information with which they are associated.