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. 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 our experience, if there are such material uncertainties, then the company usually provides disclosure as part of the basis of preparation note in the financial statements.

Disclosures are required if events and circumstances raise substantial doubt about the entity’s ability to continue as a going concern. Although the terminology varies slightly, both GAAPs share the same objective of informing users of the financial statements early about the company’s potential financial difficulties. Management’s going concern assessment may be significantly affected by the current economic environment.

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In general, an auditor examines a company’s financial statements to see if it can continue as a going concern for one year following the time of an audit. Conditions that lead to substantial doubt about a going concern include negative trends in operating results, continuous losses from one period to the next, loan defaults, lawsuits against a company, and denial of credit by suppliers. 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.

Frontier IP Group faces the future with confidence but said the outlook remain difficult given the high levels of market uncertainty. It said nonexecutive Chairman Andrew Richmond will step down at the annual shareholder meeting in December after 11 years of service. He will be replaced by Senior Independent Director Julia King, who joined the board in October 2021. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘going concern.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work. In fact, KPMG LLP was the first of the Big Four firms to organize itself along the same industry lines as clients.

• While US GAAP has extensive guidance around going concern, IFRS Standards do not.
• As companies have been upended by the pandemic, high inflation and pummeled by rising interest rates, going-concern warnings in company filings have spiked, according to Audit Analytics, a research firm.
• Liquidating a going concern can give an investor a bad reputation among potential future takeover targets.
• Known or knowable events beyond the look-forward period can be ignored in the going concern assessment, although disclosure of their potential effects may still be required by other standards.

Going concern is an example of conservatism where entities must take a less aggressive approach to financial reporting. The London-listed intellectual-property specialist said Tuesday that it plans to get cash from its investment in Exscientia, valued at GBP2.3 million, which should provide enough funds to cover the business over the year. Join an interview with CPA Recruiter Beth Dierker of Accountingfly, who has advised hundreds of accountants in finding new roles. She will update you on the current job market for tax and accounting professionals. As well as teach you how to identify and select the right opportunity, interview, follow through, and handle the tricky aspects of your job search. The going concern assumption – i.e. the company will remain in existence indefinitely – comes with broad implications on corporate valuation, as one might reasonably expect.

A company remains a going concern when the sale of assets does not impair its ability to continue operation, such as the closure of a small branch office that reassigns the employees to other departments within the company. For a company to be a going concern, it must be able to continue operating long enough to carry out its commitments, obligations, objectives, and so on. In other words, the company will not have to liquidate or be forced out of business.

For example, a company may have a profitable track record or prior success at refinancing. However, market conditions have changed as a result of COVID-19 – e.g. financing may be significantly more difficult and more costly to obtain now. When management becomes aware of material uncertainties related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern, those uncertainties must be disclosed in the financial statements. The terms ‘material uncertainties’ and ‘significant doubt’ are important – this standard phrasing is expected to be used in the basis of preparation note to the financial statements.

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Management typically develops plans to address going concern uncertainties – e.g. refinancing of debt, renegotiating breached covenants, and sale of assets to generate sufficient liquidity to continue to meet its obligations as they fall due. IFRS Standards do not prescribe how management should evaluate its plans to mitigate the effects of these events or conditions in the going concern assessment. Under IFRS Standards, management assesses all available information about the future, considering the possible outcomes of events and changes in conditions, and the realistically possible responses to such events and conditions. Events or conditions arising after the reporting date but before the financial statements are authorized for issuance should be considered.

The dreaded warning, usually buried in the fine print, often leads to sharp declines in a company’s stock price, angst for creditors and worries among employees. An unsuccessful congressional candidate for Oklahoma’s 2nd District seat in 2022, Smith-Gordon is the second person from the state Education Department’s grants office to resign in recent months. Terri Grissom, who wrote applications for competitive federal grants for the state Education Department for five years, left the agency April 18 and testified the next month at a legislative hearing.

Disclosures of material uncertainties that may cast doubt on a company’s ability to continue as a going concern as well as significant judgments involved in close-call scenarios may be more frequent as a result of COVID-19, given the continued economic uncertainty. Management should critically assess the disclosure requirements of IAS 1 and consider drafting required disclosure language early in the financial reporting process. A negative judgment may also result in the breach of bank loan covenants or lead a debt rating firm to lower the rating on the company’s debt, making the cost of existing debt increase and/or preventing the company from obtaining additional debt financing. They can help business review their internal risk management along with other internal controls. Also significant is the fact that if a business is determined to be a going concern that means that it can pay its liabilities and realize its assets.

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. A going concern is an accounting term for a business that is assumed will meet its financial obligations when they become due. It functions without the threat of liquidation for the foreseeable future, which is usually regarded as at least the next 12 months or the specified accounting period (the longer of the two). Hence, a declaration of going concern means that the business has neither the intention nor the need to liquidate or to materially curtail the scale of its operations.

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Disclosures addressing these requirements may need to be expanded, with added focus on the company’s response to the effects of COVID-19. US GAAP requires management’s plans to meet certain conditions to be considered in the assessment. A sales and use tax financial auditor is hired by a business to evaluate whether its assessment of going concern is accurate. After conducting a thorough review (audit) of the business’s financials, the auditor will provide a report with their assessment.

Thus, the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits. The “going concern” concept assumes that the business will remain in existence long enough for all the assets of the business to be fully utilized. If a company is not a going concern, the company may be revalued at the request of investors, shareholders, or the board. This revaluation may be used to price the company for acquisition or to seek out a private investor. There are often certain accounting measures that must be taken to write down the value of the company on the business’s financial reports. It is possible for a company to mitigate an auditor’s view of its going concern status by having a third party guarantee the debts of the business or agree to provide additional funds as needed.

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Unlike IFRS Standards, the going concern assessment is performed for a finite period of 12 months from the date the financial statements are issued (or available to be issued for nonpublic entities). Known or knowable events beyond the look-forward period can be ignored in the going concern assessment, although disclosure of their potential effects may still be required by other standards. Under Step 1, management determines whether events and conditions raise substantial doubt about the company’s ability to continue as a going concern.

When the financial statements are prepared for the annual report, it is the job of the Board of Directors to decide if the company is still a going concern. The Board must put this information into the footnotes included in the financial statements and state any factors that may threaten that status. Management may have a history of successful refinancing or carrying out other plans. However, current economic and market conditions are likely very different from those of the past. Given the significant effects of COVID-19, management may need to reassess the company’s access to financing sources; they may not be easily replaced and the costs may be higher in the current circumstances.

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In the event of business being liquidated, the financial statements will be calculated on the on going concern basis, which can be misleading for the stakeholders. In order for a company to be a going concern, it usually needs to be able to operate with a significant debt restructuring or massive financing overhaul. Therefore, it may be noted that companies that are not a going concern may need external financing, restructuring, asset liquidation, or be acquired by a more profitable entity. 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.