COVID-19 and financial reporting: completing year-end solvency statements
April 30, 2020
Are you aware of the implications that COVID-19 may have on year-end solvency statements and consequently audit reports?
As organisations begin preparing financial reports for the end of financial year, directors will be called upon to review and approve reports contained within financial statements like the year-end solvency statement.
With COVID-19 causing so much uncertainty, directors should take reasonable steps to obtain all information relevant to forming an opinion in respect to the year-end solvency statement.
Qualified statements by directors
The obligation of directors is to form an opinion whether there are reasonable grounds to believe that the company will be able to pay its debts as and when they fall due.
The statement may be qualified if there are material uncertainties, however directors should not qualify their statement when the circumstances do not warrant it.
A qualified statement will not of itself limit the liability of the directors, nor operate as a substitute for the proper discharge of their responsibilities.
There may be situations when the doubt over whether the company can pay its debts as and when they fall due becomes so great that it is not appropriate for directors to sign the directors’ statement with a qualification.
In these situations, directors should make a negative statement stating that the company is unable to pay its debts as and when they become due.
Preparing a qualified or negative statement
A qualified or negative statement must be clearly worded and provide enough detail for the reader to comprehend the statement fully.
The statement should identify the item which is the subject of qualification and disclose monetary details where practicable.
Where a qualified statement impinges upon the ‘going concern’ assumption as the basis for preparing accounts, the directors should explain in the accounts their reasons for adopting the assumption in the light of the qualified statement.
Similarly, where directors state that there are reasonable grounds to believe the company will be able to pay its debts despite prima facie indications to the contrary, the directors should disclose the reasons for that opinion to ensure that the accounts disclose a true and fair view.
How LDB’s auditors can help you
Your auditor is required to form a view, as to whether the directors’ statement complies with the law.
In addition, the auditor has an obligation to describe in the report any defect or irregularity in the financial statements.
At LDB, we provide special purpose and financial audit and advisory services to a range of clients including public companies, private companies, not-for-profit entities, self-managed superannuation funds (SMSFs), and more.
If you need advice and support preparing the year-end solvency statement or other financial statements, please do not hesitate to call (03) 9875 2900 or send us a message via the contact form below.