With the COVID-19 pandemic well into its second year and the start of planning for the upcoming audit season, you may have questions about how to evaluate your company’s going concern status. While some industries appear to have rebounded from the worst of the economic downturn, others continue to struggle with pandemic-related issues, such as rising inflation, along with labor and supply shortages. For some businesses, pre-pandemic conditions may never return, which can make it exceptionally difficult to project future performance.
How auditing standards have changed
Financial statements are generally prepared under the assumption that the entity will remain a going concern. That is, it’s expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business. Under Accounting Standards Codification Topic 205, Presentation of Financial Statements — Going Concern, the continuation of an entity as a going concern is presumed as the basis for reporting unless liquidation becomes imminent. Even if liquidation isn’t imminent, conditions and events may exist that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern. Today, the responsibility for the going concern assessment falls on management, not the company’s external auditors. In addition, the time period that the assessment must cover has been extended. Previously, the determination of an entity’s ability to continue as a going concern was based on expectations about its performance for a one-year period from the date of the balance sheet. Now, under Accounting Standards Update No. 2014-15, Presentation of Financial Statements — Going Concern: Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, the assessment is based upon whether it’s probable that the entity won’t be able to meet its obligations as they become due within one year after the date the financial statements are issued — or available to be issued — not the balance sheet date. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)When disclosures are required
In situations where substantial doubt exists, management then must evaluate whether its plans will alleviate substantial doubt. That is, is it probable that the plans will be implemented, and if so, will they be effective at turning around the company’s financial distress? Disclosures are required indicating that either:- The plans will mitigate relevant conditions and events that have caused substantial doubt, or
- The plans won’t alleviate substantial doubt about the entity’s ability to continue as a going concern.
