By now, most pension scheme trustees are likely to have had discussions with their auditor about preparing a going concern assessment and will have noticed that a bit more is being asked of them. It is understandable that trustees will be keen to understand why this process is more onerous and why more audit work on going concern is needed. The reasons are two-fold:
• A revised auditing standard issued by the Financial Reporting Council (FRC) on going concern, requiring auditors to undertake additional procedures. Revised International Standard on Auditing (ISA) (UK) 570 applies to audits of financial statements for periods commencing on or after 15 December 2019.
• General concerns about the impact of the COVID-19 pandemic on the financial health of sponsoring employers.
While these developments primarily focus on the corporate sector, private sector pension schemes are impacted as they prepare their financial statements in accordance with UK accounting standards and any audit work must be undertaken in accordance with the FRC’s auditing standards, known collectively as ISAs (UK).
A pension scheme is considered a going concern if its operations will continue for the foreseeable future, which is likely to be the case unless there has been an insolvency event at the employer. Its assets and liabilities are then recorded in the financial statements on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business.
In order to conclude whether the scheme is a going concern and to identify any related material uncertainties, the trustees must make an assessment.
The assessment must meet the requirements of both UK accounting standards (Financial Reporting Standards (FRS) 102) and the pensions Statement of Recommended Practice (SORP). This includes consideration of all available information about the future of the scheme, which looks forward at least twelve months from the date the financial statements are signed.
Although the trustees’ responsibility for undertaking the assessment has not changed, the auditor’s approach to their work on going concern has been strengthened by changes to auditing requirements. Therefore, trustees should notice an increased emphasis on going concern matters by their auditor from the planning stage throughout the audit process.
The auditor will require the trustees’ assessment in writing.
In December 2020, the Pensions Research Accountants Group (PRAG) updated its guidance on pension scheme financial statements and going concern in response to the revised auditing requirements and the possible implications of the pandemic. It is available to PRAG members on its website – www.prag.org.uk
The Institute of Chartered Accountants in Scotland (ICAS), the Institute of Chartered Accountants in England and Wales, and PRAG issued guidance on pension scheme reports and financial statements in the context of the COVID-19 pandemic (May 2020). The going concern aspects of this guidance should be read in conjunction with PRAG’s going concern guidance. The joint guidance is available on PRAG’s website and the ICAS website – www.icas.com
Among the changes to the revised ISA (UK) are greater emphasis on the need for the auditor to demonstrate how they have challenged management’s going concern assessment, and to thoroughly test the adequacy of the supporting evidence and evaluate the risk of management bias.
In evaluating the trustees’ assessment, the auditor will likely consider and conclude on factors including:
• The relevance and reliability of the underlying data used to make the assessment
• The underlying assumptions used by the trustees in making their assessment and evidence in support of those assumptions
• Trustees’ future plans for the scheme, including whether the plans are likely to strengthen the financial health of the scheme
and be feasible in the circumstances
A key factor will be the ability of the sponsoring employer to continue to support the scheme over the twelve to fifteen months after the date the financial statements are due to be signed.
Trustees will also need to document their evidence to support any statements made.
It is good practice for a trustee to sign the trustees’ assessment on behalf of the board when the financial statements are signed, so that all matters up to the date of signing are considered.
The auditor will also consider any additional relevant facts or information which have become available since the date of the trustees’ assessment.
Trustees will need to make complex and sometimes difficult judgements about the going concern status of their scheme and the PRAG guidance will support them in doing so by providing examples of matters and circumstances that may lead to non-going concern or material uncertainty disclosures.
The guidance provides a template for an assessment and includes examples of:
• Key matters which may be considered by the trustees in making their assessment. These include employer covenant strength, scheme cash flow forecasts, and funding levels
• Evidence to support conclusions reached.
Where the non-going concern (cessation) basis is adopted, its impact on items in the financial statements must be reported. In the case of most investments the value will not change as they are usually valued on an exit basis. and even where a scheme enters the Pension Protection Fund assessment period there is unlikely to be any need to disinvest immediately on a distressed basis.
Trustees will also notice changes in the wording of the auditor’s report around going concern. The auditor must state in their report that the trustees’ use of the going concern basis of accounting is appropriate and explain how they have evaluated the trustees’ assessment, along with the key observations from their own evaluation. Where there is a material uncertainty, this will need to be referred to in this section of the auditor’s report.
This article was featured in Pensions Aspects magazine September edition.
Last update: 15 September 2021