The current economic uncertainty and market volatility mean many aviation leasing companies doubt their ability to continue to operate. As the aircraft leasing industry has been gravely impacted by Covid-19, the impact on operations and forecasted cash flows are significantly affected.
Following the Companies Act 2014 (as amended), the Directors/Management have a statutory obligation to prepare financial statements that present an accurate and fair value of the company’s financial position. The company’s going concern assessment should document all information available that affects the company’s financial position for the foreseeable future, expected to be at least 12 months from the end of the reporting period.
The going concern is a fundamental accounting principle that assumes that any organisation will continue to operate its business for the foreseeable future, with every decision taken to continue to run the business rather than liquidating it. Given the current environment, management needs to assess whether the operating conditions precipitated by COVID-19 create significant doubt around the company’s ability to continue as a going concern.
When the Directors/Management are assessing a company’s ability to continue to operate as a going concern, they must, in the current environment, consider the existing impact of Covid-19, together with the expected future effects. Some of the critical items to consider include:
- Lease rental income deferrals continuing/expected future requests
- Geographical risk of the SPV
- The financial support available to the lessee
- Scheduled debt repayments
- Income and expenditure scenario planning
The Directors/Management are responsible for making a formal assessment of whether using the going concern basis of accounting is appropriate. If they are aware of any future events which may cast material uncertainty over the SPVs ability to continue as a going concern, this is required to be disclosed in the Director’s Report.
The Financial Reporting Council (FRC) issued a revised International Standard on ‘Auditing – ISA 570, Going Concern’ in September 2019, which is effective for accounting periods commencing on or after 15 December 2019. The revised standard also places greater emphasis on the company’s going concern analysis and impacts both an SPV management perspective and an auditor’s review perspective.
Under the revised going concern standard, the auditors are obliged to obtain sufficient appropriate audit evidence about the appropriateness of Director/Management’s use of the going concern basis of accounting and to conclude whether there is a material uncertainty about the entity’s ability to meet its obligations as they fall due. The requirement to challenge the company’s going concern assessment will increase scrutiny, particularly on its expected cashflow models considering the current market conditions in the aviation industry.
Suppose the auditors are not satisfied that the company will continue to operate as a going concern for the foreseeable future. They may include a ‘Material Uncertainty Relating to Going Concern’ clause which explains the uncertainty. If the auditor concludes that the disclosures are inadequate, or Directors/Management have not made any disclosure and refuse to remedy the situation, the opinion will be qualified or adverse.
Due to the uncertain future impact of Covid-19 on the aviation industry, an increase in qualified audit opinions may be expected over the coming months.
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