5) Going Concern

Question 1

Under what circumstances is an entity considered a Going Concern?

Answer 1

An entity is considered to be a going concern if it is reasonably expected to remain in existence and to be able to settle all its obligations for the foreseeable future.

Question 2

What is the U.S. GAAP requirement related to going concern?

Answer 2

Management must evaluate whether there is SUBSTANTIAL DOUBT about an entity’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements.

Management’s evaluation should occur for each annual and interim reporting period.

Question 3

Under what conditions would substantial doubt exist?

Answer 3

Substantial doubt exists when relevant conditions and events, considered in the aggregate, indicate it is possible (defined as “likely to occur”) that the entity will not be able to meet its obligations as they become due within one year from the financial statement issuance date (in contrast to the balance sheet date).

Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the financial statement issuance date.

Question 4

What factors should management consider in evaluating whether there is substantial doubt about an entity’s ability to continue as a going concern?

Answer 4

• The entity’s current financial condition
• The entity’s obligations due or anticipated in the next year
• The funds necessary to maintain operations in the next year
• Both internal and external matters indicating financial difficulties for the entity

Question 5

If there is substantial doubt about an entity’s ability to continue as a going concern, management should then consider whether the entity has plans to mitigate these conditions and alleviate the substantial doubt. The mitigating effect should be evaluated on the basis of what two conditions?

Answer 5

• Whether it is probable that the plans will be effectively implemented.
• Whether it is probable that the implemented plans will be successful in mitigating the adverse conditions.

Question 6

What are the three possible outcome of the analysis of mitigating factors?

Answer 6

• NO SUBSTANTIAL DOUBT EXISTS, in which case no disclosures are required and financial statements are prepared using the going concern basis of accounting.
• SUBSTANTIAL DOUBT IS ALLEVIATED, in which case the financial statements are prepared using the going concern basis, with certain disclosures required.
• SUBSTANTIAL DOUBT IS NOT ALLEVIATED, in which case the financial statements are prepared using the going concern basis, with certain disclosure required.

Question 7

What disclosures are required when Substantial Doubt is Alleviated?

Answer 7

1. The primary conditions or events that initially raised the substantial doubt about the entity’s ability to continue as a going concern.
2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations.
3. Management’s plans that alleviated the substantial doubt.

Question 8

What disclosures are required when Substantial Doubt is Not Alleviated?

Answer 8

• The fact that there is substantial doubt about the entity’s ability to continue as a going concern within one year of the financial statement issuance date.
• The primary conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
• Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations.
• Management’s plans that are intended to mitigate the adverse conditions or events.