Continuation of a reporting entity as a going concern is presumed as the proper basis for preparing interim and annual financial statements, unless and until liquidation becomes imminent. However, there may be conditions and events that raise “substantial doubt” about an entity’s ability to continue as a going concern for a reasonable period of time that require disclosure for fair presentation.
“Substantial doubt” exists when conditions or events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date the financial statements are issued or available to be issued (or within whatever look-forward period specified in the applicable financial reporting framework.)
Many entities are facing substantial doubt as a continued outcome of the pandemic. This may be due to a variety of factors, including the risk of not having the funds necessary to maintain operations considering current financial conditions, obligations and other expected cash flows within the look-forward period.
If substantial doubt at any point exists, then disclosure is required unless the mitigating effect of management’s plans have been fully implemented before the start of the look-forward period. However, if management’s unfulfilled plans meet certain criteria, then the words “substantial doubt” are not required to be used in the required disclosure. And, most importantly, audit and review reports are not required to emphasize the uncertainty. The criteria that must be met to avoid these consequences, include:
- It is probable that plans will be effectively implemented within the look-forward period.
- It is probable that plans, when implemented, will mitigate the relevant conditions or events that raised substantial doubt within the look-forward period.
Providing evidence to support both of the above criteria may be extremely difficult given the current pandemic uncertainty. Therefore, more “substantial doubt” disclosures and report modifications are likely to result compared to prior periods.
The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.
Jennifer has more than 25 years of experience in designing high-quality training programs in a variety of technical and “soft-skills” topics necessary for professional and organizational success. In 2003, she founded Emergent Solutions Group, LLC, where she focuses on designing and delivering practical and engaging accounting and auditing training. Jennifer started her career in audit for Deloitte & Touche. She graduated summa cum laude from Marymount University with a B.B.A. in Accounting.
