Annual Financial Reporting: A Quantitative Analysis of the Temporal Going Concern Status during Business Rescue Proceedings

Abstract

Purpose: Financial reporting guidance such as the Conceptual Framework for the Presentation of Financial statements (CF), together with specific International Financial Reporting Standards (IFRS) such as International Accounting Standards no. 1 (IAS 1), require an assessment of whether a company can be considered a going concern at the time of preparing its annual financial statements. According to the Companies Act, no. 71 of 2008 (Companies Act), a company in financial distress may file for temporary business rescue protection in order to reorganise its affairs to continue to exist on a solvent basis (return to solvency [RTS]) or, if that is not possible, to offer a better settlement to creditors or shareholders, than under immediate liquidation (better settlement than under immediate liquidation [BSIL]). Building on prior qualitative research in this area, this paper quantitatively investigates the temporal going concern status in the context of a South African company listed on the Johannesburg Stock Exchange (JSE) while under business rescue.
Design: The paper follows a quantitative cross-sectional design using a purposive nonprobability sampling method. Empirical data were collected from accounting and business rescue experts using a structured self-administered questionnaire. The data were analysed using descriptive and inferential statistics to detect patterns of association between variables of interest.
Findings: The paper presents quantitative empirical evidence supporting prior qualitative research on business rescue context-specific indicators of going concern. In particular, if a South African listed company files for business rescue protection, the company may not be regarded as a going concern, for annual financial reporting purposes, up to the adoption or rejection of a business rescue plan. Furthermore, the evidence shows that when a business rescue plan is adopted that aims to offer a BSIL, the company cannot be considered to be a going concern during the business rescue proceedings. Moreover, should a business rescue practitioner aim for an RTS, the evidence shows that the company can only be likely regarded as a going concern when the business rescue plan is substantially implemented.
Value: Management and auditors should note that in the case of a BSIL, the evidence presented implies an underlying assumption other than the going concern assumption. This is also implied in the case of an RTS aim prior to the substantial implementation of the business rescue plan. In the absence of any other defined underlying assumption, the liquidation basis is the de facto alternative. Moreover, the underlying assumption in an RTS will also likewise be the liquidation basis in the absence of another defined underlying assumption. Standard-setters should take note of the need to provide more guidance on the matter.