Going concern: IFRS® Standards compared to US GAAP

In fact, KPMG LLP was the first of the Big Four firms to organize itself along the same industry lines as clients. As companies have been upended by the pandemic, high inflation and pummeled by rising interest rates, going-concern warnings in company filings have spiked, according to Audit Analytics, a research firm. The dreaded warning, usually buried in the fine print, often leads to sharp declines in a company’s stock price, angst for creditors and worries among employees. But the term is rarely brought up unless a company is in trouble — that is, in cases where it has doubts it could continue as a going concern. When a company publicly uses the term “going concern,” which a lot more are doing these days, it’s almost always bad news. The going concern assumption – i.e. the company will remain in existence indefinitely – comes with broad implications on corporate valuation, as one might reasonably expect.

• Although the terminology varies slightly, both GAAPs share the same objective of informing users of the financial statements early about the company’s potential financial difficulties.
• In the absence of the going concern assumption, companies would be required to recognize asset values under the implicit assumption of impending liquidation.
• However, generally accepted auditing standards (GAAS) do instruct an auditor regarding the consideration of an entity’s ability to continue as a going concern.
• IAS 1 only states that when a company has a history of profitable operations and ready access to financial resources, management may reach a conclusion on the appropriateness of the going concern assessment without detailed analysis.
• IAS 1 states that management may need to consider a wide range of factors, including current and forecasted profitability, debt maturities and replacement financing options before satisfying its going concern assessment.

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Under US GAAP, management’s plans are ignored under Step 1 of the going concern assessment. Their mitigating effect is considered under Step 2 to determine if they alleviate the substantial doubt raised in Step 1, but only if certain conditions are met. This means management needs to run two sets of forecasts, before and after management’s plans, whereas IFRS Standards are not prescriptive in this regard. Impacts from https://thecoloradodigest.com/navigating-financial-growth-leveraging-bookkeeping-and-accounting-services-for-startups/ a fall and winter COVID-19 surge may bring further uncertainty to many companies. Management should continually evaluate the effects of COVID-19 on the company’s going concern assessment, including information obtained after the reporting date and up to the date the financial statements are authorized for issuance. The going concern concept is a key assumption under generally accepted accounting principles, or GAAP.

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Disclosures addressing these requirements may need to be expanded, with added focus on the company’s response to the effects of COVID-19. For example, the look-forward period for a company with a December 31, 20X0 reporting date is at least the 12 months ended December 31, 20X1, but it may need to be extended depending on the facts and circumstances. For example, if the company expects to lose a major customer in 15 months from the reporting date, it may be necessary accounting services for startups to extend the look-forward period up to at least March 31, 20X2. US GAAP requires management’s plans to meet certain conditions to be considered in the assessment. This includes information known or reasonably knowable at the date the financial statements are issued (or available to be issued). If managers or auditors believe that a company is at risk of going bust within 12 months, they are required to formally express that doubt in their financial accounts.

Resilience and viability in Financial Services

By contrast, the going concern assumption is the opposite of assuming liquidation, which is defined as the process when a company’s operations are forced to a halt and its assets are sold to willing buyers for cash. Going concern value is a value that assumes the company will remain in business indefinitely and continue to be profitable. This differs from the value that would be realized if its assets were liquidated—the liquidation value—because an ongoing operation has the ability to continue to earn a profit, which contributes to its value. A company should always be considered a going concern unless there is a good reason to believe that it will be going out of business. A financial auditor is hired by a business to evaluate whether its assessment of going concern is accurate.

Examples of going concern

Conversely, this means the entity will not be forced to halt operations and liquidate its assets in the near term at what may be very low fire-sale prices. By making this assumption, the accountant is justified in deferring the recognition of certain expenses until a later period, when the entity will presumably still be in business and using its assets in the most effective manner possible. Candidates should generate the audit procedures specifically from information contained in the scenario to demonstrate application skills Jasmine Co in the September/December 2018 Sample exam demonstrates this approach. The going concern assessment is inherently complex and judgmental and will be under heightened scrutiny for many companies this year due to COVID-19. Management should carefully consider the requirements of IFRS Standards and reevaluate their historical approach to the going concern analysis; it may no longer be sufficient given the current economic environment. In addition to IAS 1, IFRS 79 requires disclosure of information about the significance of financial instruments to a company, and the nature and extent of risks arising from those financial instruments, both in qualitative and quantitative terms.

Audit and Assurance

Although the terminology varies slightly, both GAAPs share the same objective of informing users of the financial statements early about the company’s potential financial difficulties. Management’s going concern assessment may be significantly affected by the current economic environment. For example, a company may have a profitable track record or prior success at refinancing. However, market conditions have changed as a result of COVID-19 – e.g. financing may be significantly more difficult and more costly to obtain now. When management becomes aware of material uncertainties related to events or conditions that may cast significant doubt on the company’s ability to continue as a going concern, those uncertainties must be disclosed in the financial statements. The terms ‘material uncertainties’ and ‘significant doubt’ are important – this standard phrasing is expected to be used in the basis of preparation note to the financial statements.

What is the role of a financial auditor?

• US GAAP requires management’s plans to meet certain conditions to be considered in the assessment.
• In the case there is substantial yet unreported doubt about the company’s continuance after the date of reporting (i.e. twelve months), then management has failed its fiduciary duty to its stakeholders and has violated its reporting requirements.
• Going concern is an accounting term used to identify whether a company is likely to survive the next year.
• By contrast, the going concern assumption is the opposite of assuming liquidation, which is defined as the process when a company’s operations are forced to a halt and its assets are sold to willing buyers for cash.
• Accountants use going concern principles to decide what types of reporting should appear on financial statements.
• The following table summarizes the five key areas of the going concern assessment that we believe are most important for management.