Financial 2 - Going Concern

Question 1

Going Concern Criteria - Description and Requirement

Answer 1

• An entity is considered to be a going concern if it is reasonably expected to remain in existence and be able to settle all its obligations for the foreseeable future
• Management is required to evaluate whether there is substantial doubt that an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued

Question 2

Going Concern - IFRS vs. GAAP

Answer 2

Major difference: IFRS does NOT offer guidance on the basis of accounting to use in case of imminent liquidation. GAAP provides specific guidance about prepping FS and necessary disclosures when liquidation is imminent
GAAP and IFRS:
-Consider Going concern a fundamental assumption
- Require the evaluation of going concern status to be performed by management (IFRS does NOT require evaluation from Board of Directors)
-Require relevant disclosures when there is doubt about an entity’s status as a going concern
- IFRS discloses when management is aware of uncertainties that may give rise to substantial doubt about the entity’s ability to continue as a going concern

Question 3

Management’s Evaluation of Going Concern

Answer 3

-Additional footnote disclosure include management’s evaluation of the significance of those conditions and a description of management’s plans that alleviated the doubt

Question 4

Not Considered a Going Concern??

Answer 4

• If a company is NOT considered a going concern, its financial statements should be prepared using the LIQUIDATION basis of accounting
• IFRS does NOT specify the basis of accounting to be used by an entity for which there exists substantial doubt about its ability to continue as a going concern (ex: going concern basis vs. liquidation basis of accounting)

Question 5

Substantial Doubt about a Company’s Going Concern

Answer 5

Substantial doubt exists when relevant conditions ad events indicate it is probable that the entity will NOT be able to meet its obligation as they come due within 1 year from the date the financial statements are issued

• Relevant criteria:
• Likelihood is “Probable”
• Time period is “1 year”
• Relevant date at which the 1-year period begins is the “date on which the financial statements are issued”

Question 6

Consideration for a Company’s Going Concern

Answer 6

• It is probable that the plans will be effectively implemented
• It is probable that the implemented plans will be successful in mitigating the adverse conditions
• Other factors are not considered in determining the entity’s plans to mitigate adverse conditions (this would mean the company’s plans are not successful)