FAR2 M2 - Going Concern

Question 1

When is the going basis of accounting used?

Answer 1

When it is presumed that a reporting entity will continue as a going concern.

Question 2

When is the liquidation basis of accounting used?

Answer 2

When the entity’s liquidation is imminent (no longer considered a going concern), financial statements are prepared under the liquidation basis (NRV) of accounting.

Question 3

Management’s responsibility to evaluate going concern.

Answer 3

Management is required to evaluate whether there is substantial doubt about an entity’s ability to continue as going concern within one year after the date the financial statements are issued.
They must evaluate for each annual and interim reporting period and consider both qualitative and quantitative factors.

Question 4

Substantial doubt for going concern

Answer 4

Exists when relevant conditions and events, considered in aggregate, indicate it is probable 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

Mitigating factors for going concern

Answer 5

Management should consider whether the entity’s plans to mitigate those conditions/events will be successful in alleviating substantial doubt. Evaluate based on:

1. How probable the plan is effectively implemented
2. How successful in mitigating those conditions.

Question 6

Disclosure related to no substantial doubt

Answer 6

No disclosure

Question 7

Disclosure related to substantial doubt alleviated

Answer 7

Financials prepared under going concern basis. Must disclose the conditions, which raised substantial doubt, management’s evaluation of those conditions in relation to the entity’s ability to meet its obligations, and management’s plan to alleviate the substantial doubt.

Question 8

Disclosure related to substantial doubt not alleviated

Answer 8

Financials prepared under going concern basis. Disclosures to include: conditions which raise substantial doubt, management’s evaluation of those conditions in relation to the entity’s ability to meet obligations, management, and management’s plan to alleviate the substantial doubt.

Question 9

Going Concern GAAP vs. IFRS

Answer 9

1. GAAP required liquidation basis of accounting if liquidation is imminent and the 1 year going concern basis requirements are not met, IFRS does not provide guidance on the basis of accounting the event liquidation is imminent.
2. GAAP required disclosures for going concern even if alleviated by management’s plans. IFRS required disclosures when management is aware of material uncertainties that may give rise to substantial doubt about an entity’s ability to continue as a going concern (at least one year)
3. GAAP requires management to assess going concern conditions within one year of FS issuance date, whereas IFRS requires the assessment at least one year form the BS date.