Going concern: IFRS® Standards compared to US GAAP

For the going concern framework, management would use March 31, 2022 as the assessment date, the date they issued the financial statements. Therefore, the 12-month look-forward period for evaluating events or conditions that may give rise to substantial doubt would extend to March 31, 2023. Management assesses all available information about the future for at least, but not limited to, 12 months from the reporting date.

Therefore, management understanding the underlying concept is a critical component of the entire assessment process. It’s given when the auditor has doubts about the company and the assumption that it is a going concern. By contrast, the going concern assumption is the opposite of assuming liquidation, which is defined as the process when a company’s operations are forced to a halt and its assets are sold to willing buyers for cash. In the case there is substantial yet unreported doubt about the company’s continuance after the date of reporting (i.e. twelve months), then management has failed its fiduciary duty to its stakeholders and has violated its reporting requirements. In addition, management must include commentary regarding its plans on how to alleviate the risks, which are attached in the footnotes section of a company’s 10-Q or 10-K.

  1. Factors to consider include when the financial statements are authorized for issuance and whether there is any known event occurring after the minimum period of 12 months from the reporting date relevant to the analysis.
  2. For example, if the company expects to lose a major customer in 15 months from the reporting date, it may be necessary to extend the look-forward period up to at least March 31, 20X2.
  3. Companies with low liquidity ratios, high employee turnover, or decreasing market share are more likely to not be a going concern.
  4. IFRS Standards do not prescribe how management should evaluate its plans to mitigate the effects of these events or conditions in the going concern assessment.

Also, while management may use the same assessment or analysis documentation from period to period, it must continually update evaluations since the look-forward period is on a rolling 12-month basis. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. In the absence of the going concern assumption, companies would be required to recognize asset values under the implicit assumption of impending liquidation. Under the going concern principle, the company is assumed to sustain operations, so the value of its assets (and capacity for value-creation) is expected to endure into the future.

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Disclosures addressing these requirements may need to be expanded, with added focus on the company’s response to the effects of COVID-19. Management’s plans are ignored under Step 1, but considered under Step 2, to determine if they alleviate the substantial doubt raised in Step 1. Recognising provisions for future losses or anticipating gains on disposals of assets would not be
appropriate where the entity https://simple-accounting.org/ is not a going concern and the financial statements are still being
prepared under FRS 102. Preparing detailed forecasts will often be challenging, particularly in rapidly changing environments. Forecasts should reflect the current economic outlook and recent post-balance sheet activity. It will be important to review and update forecasts regularly until the financial statements are authorised for issue.

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Regarding forecast scenarios, be aware management typically uses more going concern assumptions and judgment during economic uncertainty. This notion is even more critical when risks on debt covenant violations in the forecasted period could trigger a violation, thus allowing debt to be puttable by the lender. As for that last term – reasonably knowable – it’s a concept the FASB added to the guidance, essentially saying management needs to make a concerted effort to identify conditions or events without undue costs or effort. That said, substantial doubt evaluation generally falls into four different categories. As a best practice, management should start the process early to avoid any surprises on conclusions, especially when there’s a lot of risk and uncertainty around.

Accounting standards try to determine what a company should disclose on its financial statements if there are doubts about its ability to continue as a going concern. In May 2014, the Financial Accounting Standards Board determined financial statements should reveal the conditions that support an entity’s substantial doubt that it can continue as a going concern. Statements should also show management’s interpretation of the conditions and management’s future plans. The concept of going concern is particularly relevant in times of economic difficulties and in some situations management may determine that a profitable company may not be a going concern, for example because of significant cash flow difficulties.

The following table summarizes the five key areas of the going concern assessment that we believe are most important for management. This content outlines initial considerations meriting further consultation with life sciences organizations, healthcare organizations, clinicians, and legal advisors to explore feasibility and risks. A going concern is often good as it means a company is more likely than not to survive for the next year. When a company does not meet the going concern criteria, it means that a company may not have the resources needed to operate over the next 12 months.

Disclosures relating to the entity’s access to finance, terms of facilities and any covenants or restrictions will also be important to users. The most severe but plausible downside scenario will need to be assessed when forecasting. This will not be a straightforward task, as it will require consideration of both sector specific and broader economic issues, as well as any actions or decisions taken by management. When considering different scenarios, it may be helpful to refer to projections for economic activity produced by bodies such as the UK Office for Budget Responsibility or the International Monetary Fund.

Likewise, a company must also think about any related controls, including required review controls necessary to complete the assessment. In other words, what happened in the past isn’t enough to assume it will happen in the foreseeable future. Using our debt waiver example again, this dynamic is even more important during uncertain economic times or when credit markets have declined.

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A firm’s inability to meet its obligations without substantial restructuring or selling of assets may also indicate it is not a going concern. If a company acquires assets during a time of restructuring, it may plan to resell them later. Consider how a single substantial lawsuit, default on a loan, or defective product can jeopardize the future of a company.

In addition, when management’s plans do not alleviate substantial doubt, they must explicitly  disclose this fact in the financial statements by stating substantial doubt exists about the company’s ability to continue as a going concern. Because the US GAAP guidance is more developed in this area, it may provide certain useful reference points for IFRS Standards preparers – e.g. to identify adverse conditions and events or to assess the mitigating effects of management’s plans. However, dual reporters should be mindful of the differing frameworks, terminologies and potentially different outcomes in their going concern conclusions. Our IFRS Standards resources will help you to better understand the potential accounting and disclosure implications of COVID-19 for your company, and the actions management can take now. As we previously mentioned, without substantial doubt, there’s no impact to the company’s financial statements. Still when there is substantial doubt, the required disclosures will depend on whether the substantial doubt raised was alleviated by management’s plans or if it exists.

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IMEXA has been in this business for a decade and plans to continue the same for a foreseeable future. If the auditor concludes that the disclosures are inadequate, or if management have not made any disclosure at all and naic consumer alert: property insurance management refuse to remedy the situation, the opinion will be qualified or adverse. Many candidates fall into the trap of relying on ‘discussions with management/directors’ and ‘obtaining a written representation’.

This is often the case when management has a debt covenant violation and wishes to obtain a waiver. For example, if a lender provided a waiver on past covenant violations, management might expect the same for a current violation and argue they intend to receive a waiver, just as they had in the past. As another best practice, management must understand that a forecast for going concern should also reconcile with forecast assumptions used in other areas of the company, including asset impairments and income taxes.

When is an entity a going concern?

Often, management will be incentivized to downplay the risks and focus on its plans to mitigate the conditional events – which is understandable given their duties to uphold the valuation (i.e. share price) of the company – yet the facts must still be disclosed. Even if the company’s future is questionable and its status as a going concern appears to be in question – e.g. there are potential catalysts that could raise significant concerns – the company’s financials should still be prepared on a going concern basis. The going concern principle is the assumption that an entity will remain in business for the foreseeable future. Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible. In addition to IAS 1, IFRS 79 requires disclosure of information about the significance of financial instruments to a company, and the nature and extent of risks arising from those financial instruments, both in qualitative and quantitative terms.