Under U.S. GAAP, an entity is presumed to be a going concern until the entity’s liquidation becomes impending. But what exactly does that mean? Going concern signifies that the company is financially stable enough to meet its current obligations and can continue operations for the foreseeable future.
In early 2020, the global pandemic of COVID-19 caused many disruptions in everyday businesses around the world. For many businesses, you (and your auditors) will want to take a closer look at your company’s ability to meet its current obligations and its ability to continue as a going concern. For many of you, this will be their first time creating a plan to address a going concern doubt.
Here are some key elements to look at when assessing whether there are conditions or events that cause substantial doubt about your company’s ability to continue as a going concern for a reasonable period of time:
- Look at your company’s current financial condition. Make sure to review your liquid assets and consider your company’s conditional and unconditional obligations that will or could become due within the next twelve months.
- Look at your current and expected cashflows. Be careful when making your financial projections and be sure to consider the changes in the past year. These changes may include:
- Declines in customer demand
- Disruptions in the supply chain
- Significant workforce changes and challenges
If conditions or events exists, you will need to analyze your plans to alleviate that substantial doubt. Here are some key elements to consider when developing management’s plan:
- Management’s plan can include:
- Plans to reduce or delay expenses
- Plans to restructure debt
- Plans to borrow money
- You and your management team are responsible for evaluating the feasibility of the overall plan and should consider the timing and extent of the plans in relation to the timing of the conditions or events that caused the doubt of the entity being able to continue as a going concern.
- These plans should also be reviewed and approved by you and the appropriate officers of the company.
Whether or not substantial doubt is alleviated by management’s plan, your financial statement disclosures will need to include information related to the principal conditions or events that caused the doubt, management’s evaluation of the conditions or events significance, and management’s plan to mitigate the effects of those significant conditions or events. Lastly, the disclosure should include a statement that explains if management’s plan alleviates the substantial doubt or if there is substantial doubt of the entity continuing as a going concern.
As this needs to be timed with the expected issuance of your financial statements, it is best to have this on your radar. You’ll need to be aware if there are conditions or events that cause going concern doubt and, if needed, documentation to support your plan to alleviate that doubt. Having this planned ahead of time, will help alleviate any delay in the issuance of your financial statements.
Travis McGee, CPA