The International Accounting Standards Board (IASB) has amended IAS 7 Cash flow Statements and IFRS 7 Financial Instruments: Disclosures through the increase of disclosure requirements to enhance the transparency of supplier finance arrangements and their effects on an entity’s liabilities, cash flows and exposure to liquidity.

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After the pandemic crisis, other challenges are testing the mettle of some of our businesses. When should we start to worry and what solutions are available to us?

Different issues are delaying a return to pre-pandemic stability for organizations, including labour shortages, inflation and supply problems.

While the inflation rate has dropped in recent months, it remains higher than the pre-pandemic level (4.8% in September in Québec), and the current prime interest rate is the highest it’s been in 30 years (5%).

So, it’s important to know how to identify early warning signs that could lead to financial difficulties for your company, in order to prevent and better manage the consequences.

Clues you shouldn’t ignore

External environment

Some signs come from the company’s external environment, that is, the market and socio-economic context. These are elements over which the company has little control, but can generally anticipate. Many aspects must be assessed and monitored:

• Your business industry (positive and negative globalization effects, positioning compared to the competition, changing trends, life cycle of your industry);
• Technology (technological change can have an impact on your competitiveness and efficiency, thereby requiring constant adaptability);
• Availability of labour (intense competitiveness for workers can lead to high turnover and hinder retention of top talent if you’re not careful);
• Economic situation (risk of recession, exchange rates, interest rates, etc.).

It’s important to keep your eyes open for new developments. If you find that these elements are affecting your business, you’ll be in a better position to anticipate and adjust to them to minimize their impact.

Finances and cash

Your cash management is an invaluable key for monitoring the state of your finances and anticipating fluctuations. With the right tools on hand, you can plan targeted measures to turn things around if necessary.

• Your financial information needs to be reliable and updated on a timely basis, ideally monthly. Furthermore, it must be sufficiently detailed to allow for accurate data analysis.
• Your management information may include weekly dashboards, key performance indicators and product costing analysis.

You will be able to identify your vulnerabilities at the right time, make realistic financial forecasts and implement an action plan.

Internal environment

Several aspects of your company’s internal environment will also influence your financial vitality, such as:

• a drop in revenues, the source of which must be determined (loss of a major customer or supplier, outdated products, demographic or territorial change, increased competition, etc.);
• rapid revenue growth, which can have an impact on your need for material, human and financial resources;
• the acquisition of businesses and related risks;
• staff turnover rate;
• the implementation of a new computer system;
• a succession issue;
• a conflict between shareholders;
• disputes, legal proceedings or fraud.

So you need to know the environment in which your company operates, as well as general market trends. Also, you need to have effective monitoring tools at your disposal.

Solutions to consider

If your company is receiving warning signs in one or more of the categories listed above, you can consider various scenarios to try to save the day or turn your business around.

Analysis and financial forecast

An expert’s financial analysis consists of getting to know your company by drawing up an exhaustive statement of your assets, liabilities and shareholders’ equity. It allows you to:

• understand your history and your company’s financial situation;
• determine your company’s successes and failures;
• foresee your business’s future performance;
• react quickly to current or potential problems;
• communicate to your business partners the weaknesses identified and the action plan to remedy the situation.

Filing a notice of intent and proposal

This legal procedure enables you to restructure your operations in order to breathe new life into your business. When the financial situation makes this action possible, it gives managers the opportunity to:

• maintain the company afloat;
• manage cash for the company’s future needs;
• terminate commercial leases or contracts deemed non-essential;
• make necessary redundancies;
• reduce the company’s level of debt;
• obtain interim financing.

Bankruptcy

When a financial turnaround is not possible, and the company is unable to return to profitability despite the measures proposed, the last resort to consider is bankruptcy. This is a legal measure that can:

• suspend legal collection proceedings;
• protect the organization from legal proceedings by creditors;
• leave debt management to a trustee;
• limit potential losses to creditors and, by extension, guarantees.

To learn more about this topic, listen to our webinar (in French). You’ll hear specific examples and tips on how to avoid many pitfalls.

The International Accounting Standards Board (IASB) has issued amendments to IAS 12 Income taxes to give entities temporary relief from accounting for deferred taxes arising from the Organisation for Economic Co-operation and Development’s (OECD) international tax reform. The amendments introduce both a temporary exception and some targeted disclosure requirements.

The OECD published its Pillar Two Model Rules in December 2021 to ensure that large multinational companies (i.e., groups with revenue of EUR 750 million or more in two of the last four years) would be subject to a minimum 15% tax rate. The reform is expected to apply in most jurisdictions for accounting periods starting on or after January 1, 2024.

However, while the reaction from jurisdictions around the world to implement the changes has been positive, there have been major stakeholder concerns about the uncertainty over the accounting for deferred taxes arising from the implementation of these rules.

Those concerns mainly refer to identifying and measuring deferred taxes because determining whether the Pillar Two Rules will create additional temporary differences is very difficult and also which tax rate will be applicable (considering the number of factors affecting its determination).

Therefore, the IASB has acted quickly to address these concerns and provide direction on what they expect entities to disclose.