Going concern: IFRS® Standards compared to US GAAP

15 Sep Going concern: IFRS® Standards compared to US GAAP

The auditor should not use conditional language regarding the existence of substantial doubt about the entity’s ability to continue as a going concern. So, if management’s plans are expected to work, does the company have to explicitly state that management’s plans will alleviate substantial https://www.simple-accounting.org/ doubt? This will require an explanatory paragraph or emphasis of a matter paragraph in an auditor’s report. Note, however, that including these paragraphs in the audit report doesn’t change the auditor’s opinion – i.e., unqualified opinion – under the PCAOB or AICPA standards.

1. Using our debt waiver example again, this dynamic is even more important during uncertain economic times or when credit markets have declined.
2. Management needs to incorporate in their assessment based on their knowledge and awareness about what going on in the business.
3. Consideration of an entity’s ability to continue as a going concern also falls within an auditor’s procedures under US GAAS (Generally Accepted Auditing Standards).
4. Companies that are a going concern may defer reporting long-term assets at current value or liquidating value, but rather at cost.
5. Companies with low liquidity ratios, high employee turnover, or decreasing market share are more likely to not be a going concern.

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This first category comes down to a company’s available access to liquidity, including lines of credit and other liquid funds like cash and cash equivalents. When gauging access to credit, management must only include credit committed to by the lender that the company can easily access. So what are the different conditions and events management should keep in mind when assessing for going concern? First and foremost, it’s important to remember management is basing the assessment on the conditions and events relevant, known, and reasonably knowable.

Going concern considerations – a guide for IFRS reporters

Our partners cannot pay us to guarantee favorable reviews of their products or services. These materials were downloaded from PwC’s Viewpoint (viewpoint.pwc.com) under license. Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities. Management’s assessment of going concern is in the spotlight because of COVID-19 and uncertainties involved.

Control and Consolidation Under ASC 810

This foreseeable period normally has twelve months from the ending period of Financial Statements. 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. 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.

Going Concern Auditing Summary

But ask any CPA and they’ll tell you the difference is the seemingly endless series of challenges companies have faced in recent years. Between COVID, economic turmoil, remote working, and everything else the markets and world have thrown at businesses, many continue to struggle just keeping the doors open. Well, that’s precisely what a going concern assessment is for investors and, as we’re about to explain, that metaphorical dash light for your operations wields a mighty sword. However, nonprofit board responsibilities liquidating a company means laying off all of its employees, and if the company is viable, this can have negative ramifications not only for the laid-off workers but also for the investor who made the decision to liquidate a healthy company. Liquidating a going concern can give an investor a bad reputation among potential future takeover targets. The following table summarizes the five key areas of the going concern assessment that we believe are most important for management.

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The accounting concept of going concern is based on the assumption that an entity will continue to operate into the foreseeable future. Accounting standards set a high threshold for departing from the going concern basis. An entity is a going concern unless management either intends to liquidate the entity or cease trading or has no realistic alternative but to do so (IAS 1.25). 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.

We put environmental analysis in the first point because sometimes most of the management consider mainly the financial problems when performing going concern analysis. However, financial figures are the results of how the company is affected by non-financial figures, especially the environment. Related to the going concern of the company, auditors are not responsible for assessing the going concern of the company. This question is asked mainly when we talk about the roles and responsibilities of management and auditor related to going concerns of the company, and to answer this question, we should refer to the audit standard ISA 570.

If a company is not a going concern, that means there is risk the company may not survive the next 12 months. Management is required to disclose this fact and must provide the reasons why they may not be a going concern. Management must also identify the basis in which the financial statements are prepared and often disclose these financial reports with an audit report with a going concern opinion.

Management must also consider the likelihood, magnitude and timing of the potential effects of any adverse conditions and events. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, and has stated that substantial doubt exists about the company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. An entity must include disclosures related to uncertainty about its ability to continue as a going concern in the notes to the financial statements in annual and interim periods until the conditions or events giving rise to the uncertainty are resolved.

These vulnerabilities continue to shine a bright light on management’s responsibility for a going concern assessment. It is essential that candidates preparing for the Audit and Assurance (AA) exam understand the respective responsibilities of auditors and management regarding going concern. This article discusses these responsibilities, as well as the indicators that could highlight where an entity may not be a going concern, and the reporting aspects relating to going concern. 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.

The implications for financial reporting will depend on whether or not management conclude that the entity a going concern. There are also financial reporting implications when management have assessed the entity to be a going concern but identified material uncertainties that cast significant doubt on the entity’s ability to continue as a going concern. If for example, a company expects to miss a debt service payment in the coming year, then substantial doubt exists. This initial assessment is made without regard to management’s plans to alleviate going concern conditions.

Of SAS 132 states that an auditor should issue a qualified opinion or an adverse opinion, as appropriate, when going concern disclosures are not adequate. Auditors will use SAS 132, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern, to make going concern decisions. This SAS is effective for audits of financial statements for periods ending on or after December 15, 2017. SAS 132 amends SAS 126, The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern. Ultimately, management should look at going concern assessments as part of normal operations.

Usually, liquidation value is applied when investors feel a company no longer has value as a going concern, and they want to know how much they can get by selling off the company’s tangible assets and such of its intangible assets as can be sold, such as IP. A company or investor that is acquiring a company may compare that company’s going-concern value to its liquidation value in order to decide whether it’s financially worthwhile to continue operating the company, or whether it is more profitable to liquidate it. 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.