FAR 1: B/S and Disclosure Overview; Going Concern

Question 1

Identify the content of the Summary of Significant Accounting Policies not to the F/S.

Answer 1

Summary of Significant Accounting Policies

Identify and describe:

1. Measure bases used in preparing the F/S
2. Principles and Methods
3. Criteria
4. Polices
5. Pricing

Question 2

Describe the related party disclosures required under GAAP and IFRS.

Answer 2

1. Material related party transactions
2. Related party notes / account receivables
3. Control relations

Note: IFRS requires disclosures of key management compensation. US GAAP does not require this disclosure.

Question 3

What are the US GAAP requirements for risk and uncertainties?

Answer 3

1. Nature of operations
2. Use of estimates in preparing the F/S
3. Significant estimates
4. Current vulnerability due to certain concentrations.

Question 4

Under what circumstances is an entity considered a going concern?

Answer 4

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 5

What is the US GAAP requirement related to going concern?

Answer 5

Management must evaluate whether there is substantial doubt about an entity ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the F/S.

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

Question 6

Under what conditions would substantial doubt exist?

Answer 6

Substantial doubt exist when relevant conditions and events, considered in the aggregate, indicate it is probable (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 F/S issurance date (in contrast to the B/S date)

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

Question 7

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

Answer 7

1. The entity’s current financial condition
2. The entity’s obligation due or anticipated in the next year
3. The funds necessary to maintain operations in the next year
4. Both internal and external matters indicating financial difficulties for the entity

Question 8

If there is substantial doubt about an entity’s ability to continue as a GC 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 2 conditions

Answer 8

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

Question 9

What are the 3 possible outcomes of the analysis of mitigating factors?

Answer 9

1. No substantial doubt exists, in which case no disclosures are required and financial statements are prepared using the going concern basis of accounting.
2. Substantial doubt is alleviated, in which case the financial statements are prepared using going concern basis with certain disclosures required.
3. Substantial doubt is not alleviated, in which case the financial statements are prepared using the going concern basis, with certain disclosures required.

Question 10

What disclosures are required when substantial doubt is alleviated?

Answer 10

1. The primary conditions or events that initially raised 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 doubts.

Question 11

What disclosures are required when substantial doubt is not alleviated?

Answer 11

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