F2 - M2 - Going Concern

Question 1

What does it mean to be “Going Concern”?

Answer 1

It is reasonably expected that the entity will remain in existence and settle all obligations for the foreseeable future.

This is the presumption and financial statements are prepared under the going concern basis of accounting.

Question 2

What is the liquidation basis of accounting?

Answer 2

Used if an entity’s liquidation is imminent (and no longer going concern)

Requires entity to determine things such as NRV of assets and amounts owed on liabilities.

Question 3

When is management required to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern?

Answer 3

Within ONE year from the ISSUED date of the financial statements

Question 4

When does substantial doubt exist?

Answer 4

When it is probably (“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

Question 5

What reporting period(s) should management’s evaluation occur?

Answer 5

Each annual and interim reporting period

Question 6

What is the basis for management’s evaluation?

Answer 6

Relevant conditions and events that are known and reasonably knowable at the financial statement issuance date

Question 7

What factors should be considered in management’s evaluation?

Answer 7

Quantitative and Qualitative

Examples:

• Current Financial Condition
• Obligations Due or Anticipated within the next year
• Funds necessary to maintain operations for next year

Question 8

What are the important factors relative to going concern?

Answer 8

Valuation and Classification

Question 9

What is the effect of valuation on going concern?

Answer 9

Bankruptcy would cause a major plunge in value which would result in write downs of inventory, PP&E, intangibles (company name), etc.

Question 10

What is the effect of classification on going concern?

Answer 10

All the write downs are recorded as either an expense or a loss.

May cause difficulty in meeting long-term liability covenants - everything would be reclassed to short term. Lenders would want their money immediately if covenants are failed to ensure collection.

Question 11

What happens if there is substantial doubt regarding going concern?

Answer 11

Management should consider the entity’s plans to implement and mitigate those conditions/events and determine if it that plan will be successful in alleviating the substantial doubt

i.e., management has a game plan, but will it work?

Question 12

What happens if management is able to alleviate the substantial doubt?

Answer 12

Financial Statements are prepared under going concern basis.

Entity must disclose in the footnotes:

• Primary conditions/events that raised substantial doubt
• Management’s evaluation of the conditions/events
• Management’s plans that alleviated the doubt

Question 13

What happens if management is NOT able to alleviate the substantial doubt?

Answer 13

Same as if they were able to alleviate..

Financial Statements are prepared under going concern basis.

Entity must disclose in the footnotes:

• Primary conditions/events that raised substantial doubt
• Management’s evaluation of the conditions/events
• Management’s plans that alleviated the doubt

Question 14

What happens if there is no substantial doubt?

Answer 14

No disclosure required

Question 15

Basis of Accounting (Going Concern)

GAAP vs IFRS

Answer 15

GAAP - requires liquidation basis if liquidation is imminent

IFRS - no guidance provided

Question 16

Disclosures of Substantial Doubt

GAAP vs IFRS

Answer 16

GAAP - Requires disclosure whether or not management was able to alleviate the substantial doubt

IFRS - Requires disclosure when management is aware of material uncertainties that may give rise to substantial doubt

Question 17

When is management required to assess going concern conditions?

GAAP vs IFRS

Answer 17

GAAP - within one year of financial statement issuance date

IFRS - at least one year from balance sheet date