Going concern – assessing the covenant

This is a recurring theme and one that we include in Final Management Reports of schemes we audit, but one that is consistently prevalent, given the backdrop of Covid, the conflict in Ukraine and now the cost-of-living crisis. The effect of rising inflation rates, interest rates, fluctuations in foreign exchange rates, energy prices and the financial markets are felt by all.

It is important to remember too that a trustee assessment of the covenant, should be for a nineteen-month period from the year end. This covers the twelve-month assessment period from the date of the audit report and the seven-month statutory reporting deadline.

However, another facet of the LDI collapse, is the improvement in funding positions of schemes even if the strength of the employer is strong and the scheme is fully funded. Going concern might now be an issue if the scheme is considering a buy in and then a buy out and wind up.

As a reminder:

ISA 570 is the Auditing standard on Going Concern, and this states that a scheme is considered a going concern unless the trustees have taken the formal decision to wind up, or a notice has been served to wind up the scheme or a trigger event has occurred which indicates that there is no alternative to wind up, such as contributions having stopped, or the employer has experienced an insolvency event.

We are also required to report material uncertainties too, i.e. the employer entering the PPF assessment period, the employer experiencing financial difficulties and contributions that are consistently late.