However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern. The going concern concept is a key assumption under generally accepted accounting principles, or GAAP. 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. In accrual accounting, the financial statements are prepared under the going concern assumption, i.e. the company will remain operating into the foreseeable future, which is formally defined as the next twelve months at a bare minimum. Accountants use going concern principles to decide what types of reporting should appear on financial statements.
Risk Assessment Procedures
- The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.
- IAS 1 only states that when a company has a history of profitable operations and ready access to financial resources, management may reach a conclusion on the appropriateness of the going concern assessment without detailed analysis.
- Regarding forecast scenarios, be aware management typically uses more going concern assumptions and judgment during economic uncertainty.
- 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.
- The implications for financial reporting will depend on whether or not management conclude that the entity a going concern.
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. If there is an issue, the audit firm must qualify its audit report with a statement about the problem. When an auditor issues a going concern qualification, the way their opinion is disclosed depends on the structure of the business. The going concern assessment is inherently complex and judgmental and will be under heightened scrutiny for many companies this year due to COVID-19.
Going Concern Auditing Standard
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. Although US GAAP is more prescriptive than IFRS Standards, we do not expect significant differences in the types of events or conditions management would consider when assessing going concern under both GAAPs. 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 absence of the going concern assumption, companies would be required to recognize asset values under the implicit assumption of impending liquidation.
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When faced with such a requirement, candidates must be careful not to produce a list of generic audit procedures, but instead identify and highlight the factors from the scenario that may call into question the entity’s ability to continue as a going concern. Once these factors have been identified, candidates should then be able to think about the procedures the auditor may adopt to establish whether the factors mean the going concern basis of accounting is appropriate in the circumstances, or not. IAS 1 does not specify an alternative basis on which the accounts should be prepared when the entity is not a going concern. Preparers will need to determine an appropriate basis that provides relevant information that faithfully represents the non-going concern circumstances of the entity. A careful review of the entity’s accounting policies will be needed to ensure that all of its material accounting policies are disclosed.
Corporate reporting
For example, the look-forward period for a company with a December 31, 20X0 reporting date is at least the 12 months ended December 31, 20X1, but it may need to be extended depending on the facts and circumstances. 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. Receive the latest financial reporting and accounting updates with our newsletters and more delivered to your inbox. KPMG handbooks that include discussion and analysis of significant issues for professionals in financial reporting. An overview discussion of going concern assessments and financial reporting implications. If a company is not a going concern, the company may be revalued at the request of investors, shareholders, or the board.
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Listing the value of long-term assets may indicate a company plans to sell these assets. The concept of going concern is an underlying assumption in the preparation of financial statements, hence it is assumed 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). IAS 1 required management to assess whether their company is able to run for the foreseeable period or not. If the result of the assessment is found or management feels doubt about the stability of the entity, then management needs to disclose all of that significant importance in the financial statements so that users or readers could understand the situation in the company. Disclosures on material uncertainties should be specific to the entity’s circumstances.
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. US GAAP includes a two-step process that first determines whether substantial doubt about the company’s ability to continue as a going concern is raised. If substantial doubt is raised, management then assesses whether that substantial doubt is alleviated by management’s plans. Unlike IFRS Standards, if substantial doubt is raised in Step 1 about the company’s ability to continue as a going concern, the extent of disclosure depends on the outcome of Step 2 and whether that doubt is alleviated by management’s plans.
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. Although many of the resources listed below were published at the height of the COVID-19 pandemic, much of the guidance remains relevant. When an entity ceases to be viable, directors must also be aware of their additional responsibilities as directors, for example, in relation to insolvency and wrongful trading.
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. More specifically, companies are obligated to disclose https://www.simple-accounting.org/ the risks and potential events that could impede their ability to operate and cause them to undergo liquidation (i.e. be forced out of business). The reason the going concern assumption bears such importance in financial reporting is that it validates the use of historical cost accounting.
It’s given when the auditor has doubts about the company and the assumption that it is a going concern. Going concern value is a value that assumes the company will remain in business indefinitely and continue to be profitable. This differs from the value that would be realized if its assets were liquidated—the liquidation value—because an ongoing operation has the ability to continue to earn a profit, which contributes to its value. A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business.
Keep in mind, however, that if a company plans to obtain additional liquidity through uncommitted credit, it is not used in the evaluation of whether substantial doubt is raised, but rather when evaluating management’s plans in step two of the assessment. Substantial doubt exists when conditions or events, in the aggregate, indicate a likelihood the entity won’t meet its obligations due during the evaluation period – the 12 months following the financial statement issuance date. The evaluation period is commonly known as either the assessment period or the look-forward period. Further, since US GAAP doesn’t directly address the topic, a going concern assessment doesn’t affect an entity’s financial accounting, regardless of the assessment results. Thus, a company will continue to account for its financial statements under the going concern basis of accounting unless, as you guessed, it meets the criteria for liquidation.
Handing over a digital mountain of untamed spreadsheets doesn’t exactly do much to dissuade an adverse opinion from heading your way. Thus, to define and establish feasibility, management can start by looking at their past form 3052, practitioner’s statement of medical need track record of implementing plans that effectively addressed factors outside of their control. However, a company must also consider the counterparty and any significant changes since it last implemented such a plan.