Companies facing the challenge of “assessing feasibility”

In recent times, there have been abundant analyzes of the national economy and the impact of successive crises, the most recent of which was the explosion of the port of Beirut, on macroeconomic indicators. However, few analysts touched on the impact of these crises on the situation of private sector companies, a large number of which have been threatened by the economic recession, the Crown pandemic, the high exchange rate, the lack of of hard currencies, the general liquidity crisis and the banking crisis … these factors put a large percentage of institutions and companies that face the reality of closing their doors, laying off their workers and not paying their debts to suppliers or banks .. These crises affect the liquidity, solvency and profitability of Lebanese companies, which raises great doubts about their ability to continue their business.

Faced with these risks, financial results, especially accounting, arise from the data of Lebanese companies and institutions, especially as we approach the end of the year, that is, the period in which institutions must issue their accounts in accordance with approved standards, including international ones.
Perhaps the most dangerous question that external auditors and financial executives must answer is the ability of each company to develop its activity in the near future and the possibility that it will continue to serve the economy and clients. Sustainability assessment is a critical issue when closing accounts at the end of the current year. There may also be an impact on the assumptions made by management when measuring income and expenses in company data!
In other countries, which are only suffering the repercussions of the Crown crisis, many companies have declared that they will cease to function, or have clearly specified in their statements that their continuity is threatened. Based on that, it has proceeded to restructure its assets and liabilities even though many of them received government aid, so what is the situation like in Lebanon, where the Crown crisis is just one of a group of crises severe and accumulated financial and structural
Continuity is generally assessed at the end of the year, with developments up to the date the accounts are closed. In late 2019, for example, the Corona virus was considered a post-crash event that needs to be disclosed in the continuity assessment process.
Three cases can be considered when accounts are closed:
Ensure the continuity of the activity despite difficulties,
• Uncertain continuity, when difficulties lead to a situation of suspension of payments.
• Business continuity is permanently in jeopardy, as the risk of default increases for a period of no less than 12 months, and this is the case for a large number of Lebanese companies.
Currently, there are many basic unknowns, such as the duration of the crisis, its spread and its consequences. For example, when the continuation of the activity is contingent on the renewal of a credit loan, the earnings previously obtained and the ease of obtaining loans from banks in a “normal” context are not sufficient to conclude that business continuity is guaranteed . Therefore, in the current context, Lebanese companies that conclude that continuity is guaranteed at the closing date, despite the difficulties they have faced since January 2020, should provide an explanation of the reasons that led to this conclusion.

In the countries that suffered the repercussions of the Crown crisis, many companies announced that they would cease to operate, or clearly specified that their continuity was threatened.

Regarding when the continuity of the activity is permanently exposed to risk, at the closing date, the accounts must be evaluated with the net asset values. In this case, special attention should be paid to potential capital gains. The financial statements should also indicate the reasons for abandoning the going concern principle and the new valuation methods and their impact on the accounts.
We also note the effect of exchange rate fluctuations on the results of companies currently facing difficulties derived from high inflation (when calculating the exchange difference, valuing shares …).
On the closing date, monetary items (such as accounts receivable and trade accounts payable) must be converted to foreign currency using the closing price, while non-monetary items (such as fixed assets and inventory) must be converted in foreign currency using the exchange rate on the date of the transaction (that is, the date of purchase). This equation leads to changes in the structure of the financial statements.

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