What do you need to consider when preparing your assessment of the going concern basis of preparation for financial statements? It’s a question we’ve had posed to us a few times recently.
Although the pandemic has brought to the fore the need to consider the going concern assumption when preparing any set of financial statements, it has always been a vital part of the process. The rules and standards relating to this in terms of accounts preparation and auditing have not changed. The impact of COVID-19 on the economy has, however, meant that more work maybe required in order to comply with accounting and auditing standards.
This is an area that auditors have always paid particular attention to and are compelled to do so under auditing standards.
Below is a short summary of key questions, grouped by financial statement area, designed to help construct a captive entity’s going concern assessment.
Once the assessment has been prepared, an auditor should (where applicable) be able to find the answers to the following questions when auditing the assessment.
Premium income
o What is the ability of the (re)insured to continue to afford to pay the premium(s)?
o What has happened at renewal of the (re)insurance policy?
o Has premium for the renewal been delayed/deferred?
o Has policy term been extended without any change to premium?
o Is payment of the premium outside of credit terms?
o Has the need for adjustment/retro premium linked to higher claims exposure been considered?
Expenses (technical/non-technical)
o What is the exposure to pandemic risk either directly or indirectly?
o Does the (re)insurance policy cover pandemic risk?
o What is the exposure to claims from the pandemic – COVID-19 on other covers?
o Have any notifications been made to the claim hander, loss adjuster, broker, insurance manager in relation to the pandemic – COVID-19?
Current cash position and investments
o What level is it now? Projected to be 12+ months from sign off of the financial statements?
o Does the cash balance cover the projected fixed cost base for a 12+ months from expected signoff of the financial statement?
o Has owner(s) been loaned new or extended additional loan facility post year end?
o Has there been a decline in credit rating of institution(s) where cash and cash equivalents, investments (current/fixed) are held? What is the outlook for their ratings?
o Has investment manager indicated concern with positions taken e.g. Certificates of deposit?
o How have values of letter(s) of credit and security interest trust agreement(s) changed? Have these been extended, or recent changes made that indicate concern by the counter party over credit risk?
Solvency
o Is the (re)insurance vehicle thinly capitalised?
o What are the current and projected MCR & PCR levels?
o Is the MCR & PCR at minimum level currently?
o Have breaches of solvency occurred in the recent past (say last 24 months)?
o Have the GFSC been in dialog with the licenced structure recently over governance issues?
Policy holder(s), owner(s), shareholder(s) and investors
o What is the current and forecast (12+ months) financial strength of (re)insured? Has
their position of strength been in decline recently (say past 24 months)?
o What is the impact upon policy holder(s), owner(s) and shareholder(s) of the pandemic?
o What is the impact of the pandemic upon the ability of owner(s) and shareholder(s) to make contributions to the insurance vehicles, where contributions have been made in recent past. Can they continue to make them?
o What is the impact of the pandemic on the ability to repay loans (listed or otherwise). Can the entity continue to afford repayment?
Run off
o If (re)insurance programme has been curtailed, for whatever reason, have you considered the period of run off?
o Does the insurance vehicle have sufficient financial recourses to cover the remaining projected run off period?
The questions are focused upon potential areas which may challenge the basis on which the financial statements have been prepared i.e. on a going concern basis.
This note is design to help directors appreciate the expectations of an auditor around the going concern assessment.
Should you have any question please do get in contact with Nathan Hodder or Nick Le Huray.
For further guidance in relation to COVID-19 please see our BDO COVID-19 hub and our BDO global website or visit the FRC website.