- Learn the definition of a “going concern” and the reasons why the COVID-19 pandemic adversely affects businesses the world over.
- Find out how businesses evaluate going concern and the information that raises red flags.
- Learn more about annual and interim financial evaluations and which warning signs help a business draw conclusions about their future profitability.
- Find out how a one-year look-forward period may help you assess the survival of your business.
The novel coronavirus (COVID-19) pandemic has adversely affected the global economy. Companies of all sizes in all industries have closures of specific locations or complete shutdowns. Employee layoffs, furloughs or restrictions on work, liquidity issues, and disruptions to their supply chains and customers are all huge problems. So, it follows that the negative impacts of COVID-19 have brought the “going concern” issue to the forefront. (In case you are unfamiliar with the term, a business that is making a profit is a “going concern.”) With this in mind, Fiducial has some info that may help you.
One-year look-forward period
Financial statements are generally prepared under the assumption that the entity will remain a going concern. That is, the company expects 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, on the whole, raise doubt about the business’s ability to continue as a going concern.
Management is responsible for evaluating the going concern assumption. So, it makes sense that they worry when long-term viability issues arise. The probability that an entity cannot meet its obligations as they become due within one year after the date of issuance of the financial statements— or the availability of issuance– raises red flags. (The alternate date prevents financial statements from being held for several months after year end to see if the company survives.)
Making the call on going concern
Companies evaluate going concern assumptions when preparing annual and interim financial statements under U.S. Generally Accepted Accounting Principles (GAAP). The evaluation bases its conclusions on qualitative and quantitative information about relevant conditions and events known (or reasonably knowable) at the time the evaluation is made.
Examples of warning signs that an entity’s long-term viability may be questionable include:
- A reduction in sales due to store closures,
- A shortage of products and supplies used in manufacturing operations,
- A decline in value of assets held by the company,
- Recurring operating losses or working capital deficiencies,
- Loan defaults and debt restructuring,
- Denial of credit from suppliers,
- Disposals of substantial assets,
- Work stoppages and other labor difficulties,
- Legal proceedings or legislation that jeopardizes ongoing operations,
- Loss of a key franchise, license or patent,
- Loss of a principal customer or supplier, and
- An uninsured or underinsured catastrophe.
If management concludes that there’s substantial doubt about the entity’s ability to continue as a going concern, it must consider whether mitigation plans effectively implemented within the one-year look-forward period may alleviate the going concern issues. In fact, not doing so would be irresponsible.
Reporting going concern issues
Few businesses will escape negative repercussions of the COVID-19 crisis. If your business is struggling, contact Fiducial to discuss a going concern assessment. Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations. Our auditors can help you understand how an evaluation will affect your balance sheet and disclosures. Ready to book an appointment now? Click here. Know someone who might need our services? We love referrals!
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.