Updated PRAG going concern guidance for pension scheme accounts

The Pensions Research Accountancy Group (PRAG) has published updated guidance to assist Trustees and auditors of pension schemes in dealing with the increasingly raised profile of the concept of going concern when they are preparing and auditing pension scheme financial statements. The updated guidance replaces that previously published in 2018, reflecting changes made in the latest version of ISA (UK) 570 and the impact of COVID-19.

For the majority of pension schemes, the going concern assessment will remain relatively straightforward. However, there will inevitably be a small number of instances where the going concern assessment will be more challenging and disclosures will be more sensitive, particularly given the impact of the current economic environment on some employers.

Key highlights

The key highlights applicable to pension schemes are:

• An enhanced risk assessment by auditors to inform their challenge of management’s identification of events or conditions impacting going concern. This risk evaluation should include gaining an understanding of the scheme’s arrangements, reporting and processes relating to the going concern assessment.
• Greater work on the part of the auditor to more robustly challenge management’s assessment of going concern, thoroughly considering the adequacy of the supporting evidence, and evaluating the risk of management bias.
• A requirement for auditors to stand back to consider all the evidence obtained, whether corroborative or contradictory, when they draw their conclusions on going concern. 

There are also enhancements to the audit report to include a specific conclusion that the Trustees’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. This clarifies the auditor’s conclusion rather than makes a fundamental change.

Trustees are already required to make an assessment of going concern as part of their account’s preparation process, with many Trustees already documenting this in a short paper. These changes mean that Trustees need to ensure they have the evidence to support their assessment on going concern; they may be asked to provide more detailed information, as they may be challenged more by their auditors. Trustees are required to make disclosures in the basis of preparation note, including where there are material uncertainties in relation to going concern. Although there is no formal need to disclose any details of this assessment in the Trustees’ Report, Trustees may consider this helpful, if there were any difficulties in making such an assessment. Nevertheless, disclosures of the impact on the employer of the COVID-19 pandemic should be made in the Trustees’ Report.

The changes included in the revised ISAs tend to focus on clarification of requirements set out in the previous ISA, rather than the introduction of significant new requirements. Therefore, some auditors and Trustees may already by addressing much of what is covered by the revised ISA. However, those that are not will need to ensure that they do implement the relevant changes.

There is a new reporting requirement for the auditor of public interest entities, to include in their audit report a positive conclusion on whether management’s assessment is appropriate, and to set out the work they have done in this respect. However, this does not apply to pension schemes that fall into the definition of an Other Public Interest Entity (OPIE), that are those with net assets of over £1 billion and 10,000 members.

PRAG’s guidance is available to members via PRAG’s website.

What you need to do

The revised ISA (UK) 570 is applicable for accounting periods commencing on or after 15 December 2019, so the years ended 31 December 2020, 31 March 2021 and 5 April 2021.

Auditors will want to discuss the approach to going concern at the planning stage, including the Trustee documentation of the assessment of going concern, the key factors that are considered in assessing whether there are any material uncertainties and supporting evidence. With good planning, this avoids any last minute requests.