For example, under US GAAP, the look-forward period for a company with a December 31, 20X0 balance sheet date and financial statements issued on March 31, 20X1 is the 12-month period ended March 31, 20X2. US GAAP requires management’s plans to meet certain conditions to be considered in the assessment. Recognising provisions for future losses or anticipating gains on disposals of assets would not be appropriate where the entity is not a going concern and the financial statements are still being prepared under IFRS.
What are management’s responsibilities in relation to assessing going concern?
- KPMG handbooks that include discussion and analysis of significant issues for professionals in financial reporting.
- The entity is already in breach of its agreed overdraft and the bank has refused to renew the borrowings.
- If and when an entity’s liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting (Financial Accounting Standards Board, 2014[1]).
- However, audits are responsible for reviewing the management assessment and considering if those assessments are in the line with their understanding or not.
- Companies with low liquidity ratios, high employee turnover, or decreasing market share are more likely to not be a going concern.
They can help business review their internal risk management along with other internal controls. 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.
Going concern considerations – a guide for IFRS reporters
Companies that are not a going concern may not have enough money to survive, and this fact must be publicly disclosed when an auditor audits their financial statements. A company may not be a going concern for a number of reasons, and management must disclose the reason why. In accounting, going concerned is the concept that the entity’s Financial Statements are prepared based on the assumption that the entity operation is still operating normally in the next foreseeable period.
Going-concern value vs. liquidation value
Understanding whether an entity is a going concern is a key concern for management, investors and auditors. Stakeholders want to understand how viable and resilient an entity is to current and future stresses. The assumptions used in the going concern assessment should be consistent with those used in other areas of the company’s financial statements, for example impairment of assets, liquidity risk disclosures, etc. KPMG explains how an entity’s management performs a going concern assessment and makes appropriate disclosures. Q&As, interpretive guidance and illustrative examples include insights into how continued economic uncertainty may affect going concern assessments.
Key Takeaways
As part of their assessment, management must consider whether there are any events or conditions that cast significant doubt upon the entity’s ability to continue as a going concern. Resulting uncertainties are considered material if their disclosure could reasonably be expected to affect the economic decisions of shareholders and other users of the financial statements. 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. Candidates attempting AA will need to have a sound understanding of the concept of going concern.
The following table summarizes the five key areas of the going concern assessment that we believe are most important for management. Guiding you through the maze of new and emerging reporting requirements, ensuring you are always one step ahead.. The going concern approach utilizes the standard intrinsic and relative valuation approaches, with the shared assumption that the company (or companies) will be operating perpetually. In the context of corporate valuation, companies can be valued on either a going concern basis or a liquidation basis. In the absence of the going concern assumption, companies would be required to recognize asset values under the implicit assumption of impending liquidation.
The approach generally depends upon the entity, its size, complexity, history of profitable operations as well as how the entity might be affected by changes in the social, political and/or economic environment. Typically, management focuses on liquidity (ie. availability of cash for the entity to pay its way over the coming months) and performance. Management’s intentions regarding future operations and use of available mitigating actions against adverse conditions should also be taken into account. Continuation of an entity as a going concern is presumed as the basis for financial reporting unless and until the entity’s liquidation becomes imminent. Preparation of financial statements under this presumption is commonly referred to as the going concern basis of accounting.
The going-concern value of a company is typically much higher than its liquidation value because it includes intangible assets and customer loyalty as well as any potential for future returns. The liquidation value of a company will even be lower than the value of the company’s tangible assets, because the company may have to sell off its tangible assets at a discount—often, a deep discount—in order to liquidate them before ceasing operations. Examples of tangible assets that might be sold at a loss include equipment, unsold inventory, real estate, vehicles, patents, and other intellectual property (IP), furniture, and fixtures.
Performance Financial Statements Analysis is an important procedure in assessing the going concern. This analysis includes performing financial ratios analysis, as well as trend analysis. how much do small businesses pay in taxes We put environmental analysis in the first point because sometimes most of the management consider mainly the financial problems when performing going concern analysis.
Related to the going concern of the company, auditors are not responsible for assessing the going concern of the company. There are situations that may arise when the auditor may request management to make an assessment, or extend their original assessment of going concern. If management refuse to make, or extend, an assessment of going concern the auditor will consider the implications for the report. The owner of this website may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear), with exception for mortgage and home lending related products.
If a business is not a going concern, it means it’s gone bankrupt and its assets were liquidated. As an example, many dot-coms are no longer going concern companies after the tech bust in the late 1990s. If management conclude that the entity is a going concern, the financial statements should be prepared on a going concern basis. If, in reaching this conclusion, management had to apply significant judgement, then this judgement should be disclosed (IAS 1.122). Providing clear, candid and well-explained disclosures on key judgements and assumptions applied during the assessment will be critical for users.
When preparing forecasts and performing other procedures as part of the going concern assessment, management will need to consider a broad range of factors. This is not a comprehensive list of matters and considerations; these will be unique to each entity and its individual circumstances. If managers or auditors believe that a company is at risk of going bust within 12 months, they are required to formally express that doubt in their financial accounts. 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.
Management should continually evaluate the effects of COVID-19 on the company’s going concern assessment, including information obtained after the reporting date and up to the date the financial statements are authorized for issuance. Disclosures on material uncertainties should be specific to the entity’s circumstances. Users will want to understand how management reached their conclusion (including the basis of any assumptions used in their assessment) and how the uncertainty would impact the entity’s resources, liquidity and solvency. Economic uncertainty has been prevalent in global markets over the last several years due to many unexpected macro events – from COVID-19 and the related supply chain disruptions to international conflicts and rising interest rates. While some companies thrive from uncertainty, others may see their financial performance, liquidity and cash flow projections negatively impacted. These vulnerabilities continue to shine a bright light on management’s responsibility for a going concern assessment.
It can determine how financial statements are prepared, influence the stock price of a publicly traded company and affect whether a business can be approved for a loan. IAS 1 required management to assess whether their company is able to run for the foreseeable period or not. The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is assumed https://www.business-accounting.net/ that the entity has neither the intention, nor the need, to liquidate or curtail materially the scale of its operations. If management conclude that the entity has no alternative but to liquidate or curtail materially the scale of its operations, the going concern basis cannot be used and the financial statements must be prepared on a different basis (such as the ‘break-up’ basis).
The Going Concern Assumption is a fundamental principle in accrual accounting, stating that a company will remain operating into the foreseeable future rather than undergo a liquidation. Receive the latest financial reporting and accounting updates with our newsletters and more delivered to your inbox. One of larger repercussions of not being a going concern are potential credit challenges.
A company may not be a going concern based on the financial position on either its income statement or balance sheet. For example, a company’s annual expenses may so vastly outweigh its revenue that it can’t reasonably make a profit. On the other hand, a company may be operating at a profit buts its long-term liabilities are coming due and not enough money is being made. Going concern is an example of conservatism where entities must take a less aggressive approach to financial reporting.